New Year is often a time when advisers review their due diligence. With this in mind we caught up with Matt Ward, Communications Director at AKG. Matt has previously spoke to DISCUS about due diligence and has even been brave enough to appear on video! Read on for insight into his current views.

In Matt’s opinion, advisers are being encouraged by regulators to ‘go deeper’ with research and due diligence exercises when selecting products/services for their customers. He believes they need to piece together an audit trail to illustrate the process undertaken.

It is therefore in the best interest of advisory businesses to carry out robust, repeatable and recordable research and due diligence when selecting product, investment and platform solutions.

This should be done not just to facilitate best practice within the advisor business, but crucially to support the delivery of good customer outcomes.

In a market experiencing great change, due diligence will continue to increase in importance and is something that needs to be done when first identifying, selecting partners and solutions and then revisited on an ongoing basis.

There are various ways in which an adviser might go about their research and due diligence. By way of example, in order to establish a robust and repeatable framework when undertaking this for Discretionary Fund Manager (DFM) selection and retention, AKG proposes that the following should be covered:

» Proposition research and analysis

» Investment performance and style analysis

» Operational capability and service delivery

» Company-level assessment

Proposition research and analysis

Proposition research and analysis is required to compare the different propositions being marketed by the DFM. It should focus on what the customer needs and who does what (in terms of investment duties and responsibilities). The Compare tool on the DISCUS website is a good place to start this type of analysis which would typically include:

» Type of portfolio solution (bespoke, managed or unitised)

» Features and composition of the portfolios service

» Associated terms and conditions

» Costs versus value provided and transparency of charges

» Accessibility of the service via relevant product wrappers or platforms.

Investment performance and style analysis

Investment performance and style analysis requires an assessment of performance credentials and an understanding of investment approach and style. Here an adviser should seek to:

» Gain an understanding of and be comfortable with the investment approach and style.

» Review relevant past performance and request regular ongoing performance data.

» Look at how to map the portfolio service against objectives agreed with the client at the outset.

» Monitor the portfolios service performance against expectations set at outset with the client.

Operational capability and service delivery

A review of operational capability and service delivery should give advisers a feel for the infrastructure in place within DFM businesses to support the ongoing delivery of portfolio services to both the adviser business and their clients. Areas to consider are:

» Resource, staff, teams

» IT systems, digital/ tech development

» Risk management systems and governance structure

» Servicing capability

» Integration with other systems used in the business e.g. CRM, platforms.

Company level assessment

And finally, a company level assessment should look more widely than simply assets under management. Advisers should seek to understand more about the business to which customer assets will be entrusted. They may therefore wish to consider the following:

» Business structure and senior management team

» Core financials and capital position

» Financial strength and sustainability

» Image and strategy

» Distribution capability

However, a new angle that AKG would encourage adviser businesses to bring under consideration is that the due diligence exercise should be set in context against the evolving market.

The current backdrop of an uncertain economic, regulatory and political landscape, allied with an ever-changing financial services marketplace cannot be ignored. AKG believes advisers would be well placed in 2018 to look at how DFM’s will respond to some of the following challenges:

» MiFID II – Are the right systems and processes in place for 2018 and beyond?

» M&A Activity – The DFM sector is large and there will inevitably be some consolidation. What impact will be felt by DFMs involved in this activity?

» Competition – How will the DFM compete for business in the market given the level of competition for managed investment solutions?

» Digital/ Technology capability – What are the DFM’s plans in this area? And are they capable of funding and delivering any required enhancements?

» Performance – MPS track record will come under more scrutiny as many of them clock up more time in the market. How are DFMs performing against their objectives as they hit these 3 and 5 year milestones?

» Pricing – MPS pricing in particular is an extremely competitive area – how will the DFM manage this and deliver any cost efficiencies which they may need to make?

» Data – what is the quality and level of data sharing with third parties such as platforms, SIPP and Offshore bond providers?

The ability to recognise and adapt to the above challenges will inevitably be required and the capability to do this isn’t necessarily all about size and resource, although capital reserves and ongoing investment will inevitably be required. Displaying an ability to respond to key market changes and developments while keeping abreast of evolving adviser and customer requirements is vital.’

We wholeheartedly agree with Matt’s view – no-one has a crystal ball to predict the future but the checklist to help the advisers contextualise the due diligence exercise is extremely helpful when considering the potential landscape. The adviser should then assess how a DFM will react to ensure future survival and the ability to continue to deliver positive customer outcomes.

Do you agree with Matt’s view? Let us know your thoughts below.