For me though, good due diligence has never changed. I believe that the regulators with their guidance and thematic reviews are simply reminding us what is expected (and what has always been expected) when undertaking a selection process.
In broad terms, this should be the same whether the solution is a fund or a managed portfolio service.
Good due diligence should always start with knowing your client, or knowing your client segments. At its simplest, due diligence is finding out about the firm providing the product or service and then finding out about the proposition itself.
It is then a matter of exercising professional judgement as to whether the findings are acceptable to both adviser and the client. If you do not ‘know your client’, the due diligence exercise will inevitably be flawed.
In terms of what good due diligence looks like, it should be common sense. Adviser businesses will have certain questions about firms they are considering doing business with, and clients will have certain questions about what is going to happen to their invested capital and what their expectations should be from initial investment, through the investment journey and finally in terms of expected outcomes.
It is the job of the adviser to articulate the concerns of the client and factor it in to the due diligence process.
When it comes down to it there are only a handful of fundamental questions that need answering:
- Is a managed portfolio service suitable for the client? Good client segmentation and knowing your client should reveal these answers.
- Are the discretionary firms being considered in the best position to deliver on client expectations? This covers everything from financial strength and resource through to softer issues such as adviser support and investment philosophy compatibility.
- Are the MPS propositions on offer from the discretionary firms under consideration, competitive in terms of value for money and flexible enough in terms of what the client requires? This covers everything from cost and charging structure, to accessibility on third party platforms and tax wrappers, through to regularity of and arrangements for income payments.
- Are all parties clear where responsibilities lie? In the majority of cases with MPS, it is the adviser that takes on the responsibility for suitability of the proposition and the discretionary manager that has the responsibility of sticking to the investment mandate.
- What is the depth and frequency of reporting?
- Can the firm deliver on client expectations? This covers everything from portfolio risk ratings through to performance and investment manager credentials.
- Ancillary services such as online valuations and transaction histories.
- And finally, what are the exit arrangements and associated costs?
Of course these fundamental questions are made up of lots of supplementary questions, but if you and your client are comfortable with each of the headline questions, the possibility of client disappointment is greatly reduced.
Eye of the storm
So, why suggest that advisers are potentially in the eye of the storm? Well, as indicated at the start, most financial services firms have now embraced and settled in to a post RDR world.
However, as is often the case with regulation, after a few years of calm, things are about to get shaken up again with new regulation – Mifid II, Priips and a whole raft of new consultation papers.
Usually viewed as costly, time consuming and quite simply a distraction from attending to the main business of the firm. However, I believe this regulation is very good news for both adviser and the client.
There is an emphasis on transparency, which means that information is likely to become more readily available and hopefully delivered in an industry standard way. In particular, elements that have been traditionally difficult to get to the bottom of such as cost, performance and asset allocation.
