Don't buy the sales message, take a forensic approach to due diligence.


    Last Friday's FCA paper on adviser due diligence was an interesting staging post on the road to the extreme professionalism of adviser firms.

    This journey kicked off in the late 1990s when a few crazy IFAs started charging fees rather than be paid commissions by insurers and asset managers. This radically altered the economics of the industry such that they were very clearly working for clients rather than selling products from providers.

    In the old days, providers competed on commission rates and mystical product features designed to conceal the commission payments that were being made. The notion of due diligence on providers was non-existent and any attempt would have been dismissed with a 'now now' and a paternalistic pat on the head.

    These days it's different.

    Advisers have the responsibility of building their own client journeys and have the parallel responsibility to ensure the component parts have substance and will perform the role they are intended to. That has given birth to the concept of due diligence and despite a couple of ham-fisted provider attempts to, er, help (anyone remember Skandia's original somewhat self-interested due diligence questionnaire?) standards have been rising and I'd say that many adviser firms have become increasingly adept at probing for detail and assessing alignment with what they are seeking to deliver for clients.

    Although some are nearly twenty years along the road, most of this didn't go mainstream until the retail distribution review was trailed and therefore remains pretty new to most of the adviser market. And to providers. I'd suggest that given that reality we've actually travelled quite far and I think the FCA paper probably said that.

    Finding the next level first requires everyone to get to the leading edge and that means all advisers being a good bit more searching than product research. Don't buy the sales message, look for the substance. Don't accept that legacy brands will be more durable than newer ones simply because they've been around the market longer. In several instances, the once dominant have become the once relevant and there's no reason why that can't happen again.

    Ultimately, the relationships that are successful for clients obviously need to tick the boxes around features and pricing but must also demonstrate durability. This is only possible where cultures are aligned, where each party is able to make the numbers work while always investing in the future and where conflicts of interests don't exist or can be aggressively managed.

    Understanding and performing due diligence in these areas is hard work and I'd suggest requires a forensic approach involving access to corporate data, to business plans and to senior management. Anything short of this is more research than due diligence and wherever the regulator gets to, runs the risk of leaving clients short.

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