Outsourcing your investment provider: Making sure your due diligence process stands up

In recent years outsourcing your investment provider has become common practice across many financial advice disciplines as a reaction to the implications of the Retail Distribution Review. The combination of a ban on product commission and greater focus on a holistic approach to financial planning has meant the old ways of building custom portfolios have fallen firmly out of favour with the swathes of the advisory community and we’re even seeing a resurgence in long forgotten ‘tied agent’ model; albeit now defined as ‘restricted advice.’

The February publication of TR16/1: Assessing suitability: Research and due diligence of products and services was scant in terms of hard and fast guidance for firms looking for robust procedures to follow. Even with this and its relatively small sample of firms interviewed in mind, it was a clear statement of intent from the FCA. Following the forthcoming Policy Statement in June on the adoption of MiFID II, due diligence is likely to come under heavier regulatory scrutiny before January 3rd 2017.

So with this in mind and an eye firmly on due diligence and a view to fixing the roof whilst the sun is shining, perhaps now is an ideal time to pressure test your own internal processes. Having been immersed in the due diligence procedures of the advisory community, I have put together my own simple checklist that can be useful as a straightforward litmus test. It isn’t revolutionary, but it is a handy sense check and if codified can act as a useful backstop against external scrutiny.

  • Am I confident I understand the provider’s range of products and services?
  • Do the provider’s products demonstrably align to the neveeds of my clients?
  • Can I clearly explain to my client the nature and mechanics of the provider’s products and services?
  • Is the provider’s investment process robust and does it stand up to scrutiny?
  • How does the provider design, construct and manage their products to achieve specific outcomes?
  • Does the provider employ specific risk controls to ensure that my clients’ best interests are protected?
  • Are the provider’s views on markets broadly consistent with consensus? If not, is there good reason for this?
  • Can I monitor that the provider and their products are doing exactly what they’re supposed to do on an ongoing basis?

By no means is it a comprehensive process, but perhaps a useful jumping off point to build or expand your existing ones; being able to explain answers to each question obviously helps demonstrate due diligence too.

It was the Nobel Laureate George Bernard Shaw that once wrote “the power of accurate observation is commonly called ‘cynicism’ by those who haven’t got it.” As one often accused of being a cynic, I find myself in the position of prescribing it as the best tonic to our adviser clients with aplomb. Always remember that you are the last line of regulated contact your client has and that it is you who is scrutinised for their outcomes – and there are many examples of this still fresh in many of our minds, whether ‘fair’ or not – so be sure to keep those observations accurate and laser focused.