Earlier this week we hosted our first ever ‘live’ event with Bankhall and FP Today in London. Just over 80 delegates, including financial  planners and advisers, paraplanners, compliance directors and discretionary investment managers, assembled to DISCUSs Due Diligence for Discretionary Investment Services.

We were delighted to have Rory Percival as one of our main speakers who provided his views on what good due diligence looks like, the basic expectations of the regulator and a sensible five step approach for advisers. Below is a summary of key insights from Rory’s presentation.

Start with the client in mind

Before you begin to evaluate the discretionary investment services available, you will need a clear understanding of your client bank, and in particular, the specific needs of different client segments. What investment solutions are the most suitable? Where does discretionary fit within this?

Rory cited three examples;

  1. If you have a category of clients who want an all in one, simple solution, perhaps a multi-asset fund is appropriate or a managed portfolio service using the same investment approach.
  2. Clients with complex investment situations – such as CGT laden portfolios, with share options, needing to manage out capital gains over time. This level of complexity could sit well with a bespoke discretionary mandate.
  3. Clients with complex retirement income needs (we covered this in a previous post). For example, those who might need flexibility with lump sums or coming out of pensions with a large drawdown pot. This is another area where a bespoke discretionary mandate could be appropriate.


What the regulator expects

The regulator expects you to seek out solutions aligned to the needs of your different client segments. Under no circumstances should you select a discretionary investment manager (or managers) and then retrofit your due diligence – Rory said that even less senior representatives from the regulator can spot this from a mile off!

In order to remain independent and ensure you adhere to the responsibilities of independent status, you don’t need to consider the ‘whole of market’ each time you recommend a discretionary service. This is due to the distinction between a discretionary investment service and a retail product – the former is a service and therefore does not attract the same ‘whole of market’ criteria.

A sensible approach is to create a panel of discretionary investment managers, each with a value proposition (and investment service) aligned to the needs of your different client segments. If you appoint a panel it is imperative that all advisers have a clear understanding of each investment service, the reasons it was chosen and the situations where it would be most suitable for a client.

Due diligence processes should be genuine, robust and impartial. Rory shared the following structure, which you might consider using in your firm.

1. Create a ‘long list’ of discretionary investment services

Your long list must be impartial and consider those services that offer the best ‘fit’ with your client needs. By long, Rory recommends a list in the dozens – most certainly not less than twenty.

When creating your initial list take care not to just include the usual suspects. You will need a broader view of the market and the different propositions available (our Compare tool is a good place to start).

2. Establish a ‘short list’ using your own criteria

The next stage involves filtering out any non-suitable propositions based on your own criteria. By this stage you should have clarity about what it is you are looking for and the most important criterion for selection. Ranking by ‘must have’ and those items that are ‘nice to have’ should help you to sort the propositions quite efficiently.

Consider all aspects of the services, including qualitative information and hard data such as costs and performance. When filtering it’s important to remain impartial and use independent sources of information – don’t simply rely on the marketing materials provided by the discretionary managers you are evaluating.

3. Probe the shortlist

Undertake more detailed comparisons of the shortlisted propositions, probing each one to ensure a deep understanding. Consider the intricacies of how the relationship will operate in practice, including who is responsible for risk profiling, how this will be done and how each risk profile will marry with the associated investment portfolios.

Good practice would be to create a process flow, clearly marking the activities and responsibilities of the advisory firm, the discretionary manager and if appropriate, the wrap platform.

Use this final layer of probing to finalise and appoint your discretionary investment provider(s).

4. Implementation

The next stage involves executing the legal agreements and fine tuning the operational aspects. A key component of this is in-depth training of advisers and back office staff. Everyone in your firm should understand the nature of the service, why it has been selected and when it is most appropriate for a client.

5. Establish systems and controls

This final step in the process involves evaluating where the risks are in the relationship, mapping these out and how you will mitigate them. Are there any potential conflicts of interest? Is there any risk-profile misalignment? How will cash flow modelling fit within process flow?

In conclusion, your due diligence process should start with deep thinking around the specific needs of your clients before evaluating the solutions that are most appropriate. If you start from this point sensible solutions should result.

Rory stressed numerous times the importance of remaining impartial – don’t just go with usual suspects or appoint discretionary managers based on a single pitch. Dive deeper to ensure a genuine understanding and ‘fit’ with your clients and business.