Following its work on assessing suitability, the FCA said it was disappointed to identify issues relating to platform research and due diligence.

    The regulator said at the time it was particularly disappointed given it had previously set out its expectations in this area. 

    So what does the FCA expect?

    In its 2016 thematic review, the regulator defines research and due diligence as the "process carried out by the firm to assess (a) the nature of the investment, (b) its risks and benefits and (c) the provider to establish whether they believe it appropriate to entrust the provider with client assets.

    "The firm needs to understand these factors in order to judge whether the solution is suitable.”

    The paper also cites the FCA's expectations around the fair treatment of customers, including that a firm should consider:

    1) the nature of the products or services offered by the provider and how they fit with the customer's needs and risk appetite;

    2) what impact the selection of a given provider could have on the customer in terms of charges or the financial strength of the provider, or possibly, where information is available to the distributor, how efficiently and reliably the provider will deal with the distributor or customer at the point of sale (or subsequently, such as when queries/complaints arise, when claims are made, or a product reaches maturity).

    Going back further still, when the FCA was the FSA, the regulator's final guidance on assessing suitability stated:

    "Firms should satisfy themselves that, at the time they select investments for customers, they have reasonably considered what risks could be associated with the investment and that they understand these."

    So what does all this mean for advisers in terms of a practical due diligence process?

    Financial stability

    When carrying out due diligence on behalf of the advisers we work with, we consider the platform's financial stability and longevity to be the first key area of research. 

    While the regulator's first consideration relates to fitting a client's needs, we believe that without financial strength and longevity, the platform and/or product wouldn't be able to do this. That's why financial stability is our starting point.

    There are several ways to identify financial strength. 

    We tend to use AKG ratings, which are freely available direct from AKG. 

    Most platform providers will have a copy of their AKG report, meaning that should you want to dig further, you can do. 

    We like AKG because the ratings go beyond just solvency (although this will always be an important part of the rating).

    The rating also takes into account what format an organisation may be able to survive to meet the fair expectations of its clients, including operational abilities and performance.

    We leave it up to the advisers we work with to decide the level of rating they think appropriate to meet their client’s needs.

    Combined with this, we use Finalytiq's annual advised platform survey to assess the profitability of each platform, as well as its  overall assessment of the platform’s financial performance ratings.

    Capital adequacy requirements are tough on all platforms. Every platform needs to have a plan in place for how it would exit the market, irrespective of current financial strength, and treat customers fairly in the process.

    As a result, it's extremely unlikely a platform would disappear overnight.

    Yet following the collapse of Beaufort Securities last year, it emerged that client assets can be used to fund the costs of insolvency proceedings. 

    This has raised questions for advisers about what happens in the event of an advised platform going bust, and emphasises why platform due diligence is so crucial. 

    Finalytiq provides five years of financial performance for 21 advised platforms, accounting for 95 per cent of the total assets under administration (AUA) in the adviser market. 

    Alongside AUA it examines revenue, pre-tax profits or losses, yield on assets and profit and loss account reserves.

    The final rating awarded by Finalytiq, together with the AKG rating, provides us with a smaller list of platforms. From there, we move on to examine other areas. 

    Cybersecurity

    Some platforms have been extremely open in answering what are some pretty searching questions about the systems they have in place to protect consumers from fraud and to protect client data. Others, not so much.

    One platform actually gave us a completed cybersecurity questionnaire, which then spurred us to ask the same questions of other platforms.

    We ask things like:

    • How does the platform ensure that client data is protected and systems are secure?
    • How robust are the platform's information security management systems?
    • What controls and risk assessments do you place on third parties? 
    • Where is client data stored?
    • What changes has the platform implemented post-GDPR? 
    • How and where is data backed up?
    • What continuity plans does the platform have in place?

    All this provides us with a picture of not only what measures the platform has in place, but also whether the platform is open to providing this information.

    If they are reluctant at the outset, alarm bells start ringing as to how co-operative they might be in the future, and whether this is a relationship that the platform itself wants to invest time into.

    Service, support and price

    Once we've gathered the above information, we'll then filter out the names that both we and the adviser aren't overly happy with, and focus in detail on what it is that their clients need.

    We send out a questionnaire to the advisers we work with to help us understand their clients, the products they may need, and things like whether or not online access is important to them.

    Most platforms will provide most of what a client needs. But there are occasions where clients need a particular type of product or investment in order to meet their objectives.

    We then look at what services and support the advice firm needs to help them be a profitable and scalable business. 

    Without these things, the adviser won't be in business for long, so it can be argued this also fits in with client needs.  

    The kind of things we examine are: 

    • Can the platform facilitate the adviser's centralised investment or retirement proposition?
    • Does the platform offer the investment vehicles required to meet client’s needs? 
    • Does the platform have the ability to communicate with the adviser’s back office system?

    We also include details of any previous experience of the platforms that the advisers, paraplanners and/or the administrators may have, including issues in the past that would make them not want to work with that particular platform in the future. 

    This reasoning needs to be documented, not just anecdotal.

    Once we have this, we are typically left with around five to six platforms that can meet all of the criteria.

    From there, we carry out the price analysis. 

    It's true that price is what you pay, not what you get. But if a platform can meet all the other criteria and offer good service, why would you want your clients to pay more?

    Our analysis is based on the cost of placing assets on the platform across several different asset levels using several different products. We then identify where the majority of clients sit within that analysis and make a further shortlist.

    At this point we'll typically have about three or four platforms, and our final decision is based on the Defaqto service ratings, which will generally result in two or three platforms that meet both the client's and the adviser's needs. 

    One platform might be more cost-effective with a lower level of assets and another at a higher level, with another platform that might offer a particular product, but this isn't the case all the time.

    Platform due diligence is a time-consuming process.

    But we believe if done right, it can actually save you a lot of time too. It drives efficiency, but also leaves you safe in the knowledge that you have done sufficient research to back up your recommendation. 

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