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The art of due diligence

In this maelstrom of invective towards bankers, I have to admit to some mixed emotions. Back in the 1980s, a young partner in a national accountancy practice helped me avoid one bad purchase and what would have been a disastrous sale of my firm. We stayed in touch and met up from time to time when he was in town dealing with a major liquidation.

Recent events elsewhere in the market have shown instances where greater due diligence would have been beneficial but sometimes the rules for quoted companies frustrate full and frank disclosure.

Maybe we need an approach along the lines of house purchases, where there is comeback if the warranties are not kept to or if information is misleading. At the moment, the buyer of a company has little protection.

Events such as fund withdrawals do nothing to inspire confidence in the industry. The revelation that the FSA was warned over the Icelandic banks, yet failed to act also adds to the lack of trust and the PR debacle at Standard Life must have made Sandy Crombie want to retire, if nothing else.

I, along with other press commentators, was briefed on the sterling fund and I said then that compensation would be due but that as the fund had probably returned more than cash, it would be a zero-sum game. We need at some point to trust providers but they must be honest with us and being proactive is always the best way.

Delivering on treating customers fairly means operating proper research and considering the downside of products and funds as well as the heavily promoted upsides. If they are unduly complex, can our clients truly understand them and sign their name to this effect? I think not. Simplicity and transparency are vital if we are to avoid hidden risks.

My grandfather once said to me that those seeking something for nothing would end up with nothing for something. Greed clouds the vision and we can see plentiful evidence of that in the case of Madoff.

People promised returns based on insider information cannot complain about their losses, nor can so-called professional fund managers blame the Securities and Exchange Commission when they chose not to do any effective due diligence.

“Ignorance is no excuse” is a legal maxim but it applies to all professional advisers, whether they are advising a granny on her financial affairs or a government on the subject of a former chief executive’s pension. That young accountant who steered me away from a bad deal was one Fred Goodwin.

His eye for detail when I knew him was without compare – I am sure it has not gone but it is very different in a business the size of Royal Bank of Scotland and with delegation comes risk. We should also remember that if RBS had failed to do the ABN Amro deal, Barclays could very well be in its place.

Due diligence is an art, not a science. When you think it is the latter, you are very likely to have a disaster on your hands.

Robert Reid is principal of Syndaxi Financial Planning

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