RSMR: Fine tuning your product and platform due diligence

This year is already turning into one of the unexpected. Who would have expected Leicester City to win the Premier League title? Or that Donald Trump would be continuing his incomprehensible march towards the White House? Or that the FCA would release a due diligence paper one could read in less time it takes to drink a cup of coffee?

Much has been said about the regulator’s brevity in its paper but the message is nonetheless an important one: advisory firms of all sizes should have consistently robust methods for researching and selecting products and platforms.

Of course, this message should not come as a surprise. In the aftermath of the RDR, most firms have already recognised the importance of establishing a suitable process that helps them to run more efficiently. After all, this is the most effective way of building a successful business, with the added bonus of keeping the regulator happy.

So if the FCA (admittedly from a small sample) is identifying continuing issues with firms meeting an appropriate standard of due diligence, then what is the best way to improve?

Let’s start by considering what the regulator sees as good practice. The thematic review reveals two key areas of positive behaviour: firstly, where a research and due diligence process is a central function that places the clients’ best interests at heart and, secondly, where a firm has a culture that challenges the status quo.

To consider how best to incorporate these key behaviours, advisory firms should think about their clients and their service proposition. Questions to ask are:

  • What does my client base look like?
  • Are my clients segmented according to their different needs?
  • Do I have a clear investment proposition and philosophy, and do I articulate this clearly to my clients?
  • What products and services do I have at my disposal to meet the most common objectives I identify from my clients?

Once an adviser has clear answers to these questions, the next stage can begin: the construction of a suite of researched funds and products that will meet the most commonly identified client objectives. Think of this as an investment matrix, which will typically include a fund panel of both single sector funds and multi-asset funds, a collection of model portfolios and options for investment trusts, and discretionary fund managers.

Alongside this investment matrix, firms should also consider the platform choices most suitable for clients. The FCA has shown particular concern about this aspect of due diligence and while platforms are broadly an adviser tool alongside risk profiling and back office software, they are nevertheless typically paid for by clients, so their needs and requirements should come first.

Different sized firms will approach this research in different ways. Larger firms will often have greater resources to do much of the work but may still outsource some aspects to ensure they receive specialist, impartial input. This is also a good way of introducing a “culture of challenge” the FCA likes to see.

Smaller firms, meanwhile, might struggle to commit the resources to perform research across the whole market and could need support. Investment research from a good quality fund-rating agency can save many hours of research, while there are also numerous resources to help with platform research.

The FCA recognises different sized firms have different resources but it does ask that all firms take reasonable steps to ensure a recommendation is suitable for a client. The higher the quality of the research, the less chance of providing unsuitable advice, so the research must be robust.

For example, when selecting funds, firms should ensure they incorporate both quantitative and qualitative research. Simply focusing on “the numbers” will only show past performance, whereas a thorough qualitative assessment will provide more information on the people, processes and capabilities of a fund and how it is likely to behave in different market conditions.

Constructing the investment matrix and identifying the most suitable platform for clients is just the start. It must also be monitored to the same robust standard. Larger firms are more likely to have a formal investment committee to provide strategic oversight but even smaller owner-operated firms should try to regularly allocate time to review their research, document any changes and apply these to clients.

Firms should also remember their chosen products, funds and services should still be given careful consideration for each individual client. Some clients may even have objectives that require a solution not available on the investment matrix or which requires an “off platform” option. Do not fall into the shoehorning trap and always be ready to perform a piece of bespoke research.

The recent paper is just the start of the FCA’s focus on the whole area of research and due diligence, so it is vital advisers take a close look at the process they are following and ask whether there room for improvement.

Jon Lycett is business development manager at RSMR