Back in February the regulator published TR16/1 Assessing Suitability: Research and Due Diligence of Products and Services. At the time this particular thematic review received a muted reaction from the market and while we saw a fair amount of chat on Twitter, we questioned whether it contained enough detail to evaluate whether an advisory firm's due diligence processes were up to scratch.
At DISCUS we decided to dig a little deeper to see if advisers, like us, felt the paper lacked detail and therefore are still waiting on the promised guidance from the regulator. We ran a short research study, the findings of which you’ll find below, along with our thoughts on what due diligence looks like.
One thing we know for certain as an outcome of TR16/1 is that the regulator has due diligence in their line of sight. So, to us, we believe this is an area where advisers should look more closely (we’ve even asked Rory Percival to share his views at a morning seminar on 6 December in London).Firstly, what are the key messages from TR16/1?
› Due diligence of products and services is something advisers need to do - and have a formalised process in place
› Advisers shouldn’t attempt to cut corners and make the solution fit to what they currently do (particularly with regard to platforms)
› Due diligence should be a central function of the advice process and lead to appropriate client outcomes.
Unfortunately the paper failed to set any ‘ground rules’ around what exactly advisers should be doing and how often they need to do so. Our research indicated that 76.5% of advisers are yet to take any action. Why? Many are assuming their current approach to due diligence is adequate - until told otherwise. The rest are currently working on projects to review their internal processes, with the view to possibly making changes going forward.
One adviser said:
“I am a one adviser firm specialising in pensions so I focus on particular areas and have a due diligence process that fits what I do. I keep this under regular review. The biggest barrier to good research are the ‘so called’ research tools - for which there is typically a fee!”
We asked advisers to tell us how often they review their current investment provider relationships. Almost half conduct periodic reviews, while 28.6% have a process for reviewing their partners each year. The remainder will review their providers whenever they identify an issue with a relationship (without waiting until their usual review period rolls around).What does good due diligence look like?
We’ve spent a fair amount of time considering due diligence for advisers and you can find a lot of content on our website. Based on TR16/1 we’ve identified a few learnings that may be used as a starting point to keep in mind as you review or refine your approach to due diligence:
» Suitability is key. Do you understand the nature of the investment, risks, benefits and enough about the provider to assess whether they are appropriate to appoint to manage your clients’ assets?
» Information used should be objective. Is the information you are using as the basis of your research factual and reliable? The FCA has warned that you shouldn’t ‘always rely on the company’s marketing material’.
» Avoid status quo bias, this can lead to inconsistent and inefficient research. Seek to identify if you have an inappropriate bias towards a product, service or provider. Has this bias led to a lack of objectivity or a desire to ‘keep doing the same’ because it works? Often it’s easier to keep doing the same thing, but will that lead to appropriate client outcomes?
» Research requires good systems and controls. This is probably the area where more guidance from the regulator would be helpful; however the FCA has been firm on one point: assessment criteria needs to be clear.
» Individual suitability is still important even when using a Centralised Investment Process (CIP). Individual suitability needs to be assessed, particularly when considering risks and benefits. Furthermore, everyone in the firm needs to understand why the CIP is being used and be kept abreast of any changes or amendments.
The regulator may very well distribute further communications over the coming months to set out their expectations in this area. In the interim, we are hosting an event on 6 December with Rory Percival to understand his views on due diligence for discretionary investment managers. Following the event we will publish an Insights Paper, the contents of which we will share here on the Illuminate blog. If you can join us at our event, there are just a few tickets remaining. Register your interest here.