We recently caught-up with Mickey Morrissey, Head of IFA sales at Smith & Williamson on the subject of due diligence for discretionary investment services. Mickey’s biggest bugbear is the oversight of a crucial questioning by advisers, prevalent in almost all of the due diligence questionnaires he has seen. We have labelled it ‘the single most overlooked question in DFM due diligence’. Intrigued? Watch the video to find out more (it’s just 3 minutes long).

 

DISCUS Coffee Talks with Mickey Morrissey from Abbie on Vimeo.

 

Can’t watch the video? Below is a summary of the key points:

When Mickey receives due diligence questionnaires from financial advisers seeking to evaluate discretionary (DFM) or Model Portfolio Services he finds that often they contain ‘the same old stuff’.  From information on the investment process, to the organisation of the company, performance and fees – but that’s largely about it.

The most overlooked question in DFM due diligence

In Mickey’s view one of the most important areas to evaluate is always left out: the culture of the company you will be dealing with. At DISCUS we find this particularly interesting, given research indicates that when a professional relationship fails in 98% of cases it can be attributed to a ‘lack of cultural fit’. It is however understandable, as culture is intangible and notoriously difficult to measure.

Smith & Williamson take culture very seriously. Mickey explains that the easiest way to look at this area of due diligence is to evaluate the way a company is structured.

Consider the ownership structure

Many discretionary managers (DFMs) and wealth management firms within our profession are publicly quoted companies. This means that in addition to their clients, intermediaries and themselves, they also have to worry about delivering value to their shareholders.

Some DFMs are owned by private equity companies so similarly they have to report to their private equity owners and aim to increase profits year-on-year. Often this will involve squeezing as much out of the business as they can, in order to deliver a return to their investors.

By contrast, Smith & Williamson are a partnership. The business is made up of a collective group of partners and their clients. This means that their interests are aligned and they are very much ‘in it with their clients’.

What questions can you use to evaluate corporate culture?

At the end of the video Mickey lists five questions to help an adviser to evaluate the culture of a DFM they might be looking to partner with.

1. Ownership structure. Is the firm a limited company? Is it publicly traded or privately owned? Is a private equity firm involved?

2. Strength of management. How strong is the current management team? Can you meet with the senior management to determine if there is an alignment of interests?

3. Acquisition target. Is it likely that the firm will be acquired at some point in the future? If so, this could be frustrating if you have introduced a number of clients and if the takeover will have significant impact on the way the business is run.

4. Staff turnover. High staff turnover should be a red flag that the culture is less than desirable. Mickey recently uncovered that Smith & Williamson have a staff turnover of less that 3% in their investment management business.

All of these elements combined should help advisers to make a judgement call as to whether the corporate culture of the DFM is aligned to their own values.

Do you have any questions or comments to add on corporate culture? If so, please post in the space below.

 


This post was created for the DISCUS website, based on an informal discussion with Mickey Morrissey of Smith & Williamson captured on film for the DISCUS COFFEE Talks series. You can find out more Smith & Williamson’s discretionary investment services here ›