Now, due diligence is difficult, and here’s why.

Late last year – seems longer – we did a bit of work for Synaptic on how product comparison and projections fare in the post-RDR world. Once our phone had stopped ringing from models of our preferred gender trying to fling themselves at us as a result, we wrote this up into a paper which I’m pretty sure you can still download from the Synaptic Software website.

Among our findings were that:

  • share classes are a mess
  • comparing on and off platform products is a b***er
  • adviser charging capability varies hugely between platforms
  • packaged investment solutions make things even harder and don’t even start us on DFMs
  • all this can make a big and negative difference to a) your client and b) you

At the time of writing the paper, we’d not long had a Thematic Review from the FCA on how advisers were implementing the RDR. TR13/5 – for that was its name – shone an admittedly fairly weak light on adviser charging and reinforced the need to show adviser charges in pounds (by the time you read this I think we’ll have had the Scottish independence referendum, so if you’re north of Berwick please substitute ‘poonds’, ‘euro’, ‘bawbees’ or ‘groats’ as appropriate) rather than in percentages, which it appears no-one understands.

If we don’t, and I mean right now, completely overhaul the teaching of arithmetic in this country … well, that’s for another day.

We found stuff in TR13/5 which we were able to extend into adviser platform or product selection processes. We came up with four tests you need to be able to ask yourself:

Is my current product selection and projection process:

  1. in line with the letter and spirit of current FCA requirements?
  2. in customer interests and communicated clearly, fairly and in a way that isn't misleading?
  3. demonstrably unbiased?
  4. future-proof?

Those tests have been at the front of my mind recently as we had the chance to provide a little input to the next FCA thematic review comin’ atcha from the fun-boys at Canary Wharf. This TR will be on ‘due diligence’ (horrible term) and adviser processes thereto (posh).

Now, if you’re reading this – and if you’re not we’re in some very strange self-reflexive conversation – then we assume you are smarter than the average bear and you have a comprehensive, well-organised and WRITTEN DOWN due diligence file for your primary, secondary and possibly tertiary platform relationships. If not, now would be an excellent time so to do. You may choose to use third-party systems to help you with this.

Now, due diligence is difficult, and here’s why. If you were simply selecting stuff that you were going to use as an adviser firm, you’d have a tough enough time. The age of being able to compare and select platforms based on a comprehensive functionality tick-sheet is long gone (and if this is your model, it’s time for a trip to the due diligence file shop). Most platforms do most things now, and in a very welcome development, those who don’t tend to be pretty upfront about it. Skandia doesn’t offer equities. Alliance Trust Savings doesn’t have a rebalance function (it’s on the way). And so on.

A while back, the regulator published a helpful factsheet, which gave 9 key areas for you to think about:

  1. The platform provider
  2. Terms and conditions of using the platform
  3. Charges – including actual cost, charging structure and transparency of charges
  4. Range of funds, tax wrappers and other products available
  5. Range of asset classes
  6. Functionality
  7. Accessibility
  8. Additional tools
  9. Support services

Providers and due diligence salesfolk fell hungrily on this, and 1001 questionnaires based on ‘the 9 tests’ (give me strength) started circulating. However, even this isn’t as much help now – it’s a starting point, no more. As we found in our paper for Synaptic, the advent of preferential share classes has knocked everything into a cocked hat, and even if that doesn’t affect you, we think the water has been muddied by what we know of the forthcoming TR and also the recent Guidance Consultation 14/3 (GC 14/3), which concerned itself with the provision of information about financial services to customers.

As part of this work the FCA commissioned research into how customers experience and engage with this information. And, surprise surprise, it turns out that customers want:

  • the ‘must know’ facts in easily digestible nuggets of plain English
  • a clear and consistent format for ‘must know’ facts and for charging to help comparisons
  • telephone support, with easy to find details
  • clear information at purchase on recourse
  • reminders of the key points of purchase before the final decision is made

Where does customer disclosure come in the pecking order for selecting platforms? If platforms (whisper it) aren’t all that good at providing customer-friendly information on what it is they do, then does that burden fall to the adviser? How much failure demand does that put on the firm and what are the resource implications?

Tied up in all this is the old saw about who pays for platforms and who benefits. Based on our discussions around the place and our spidey-sense, we think that any quality due diligence file which would measure up to the inevitable examples of ‘best practice’ in the forthcoming thematic review will have to demonstrate suitability for the customer first, and the adviser practice second. In our experience, due diligence files we’ve seen are generally the opposite way around, if the client is mentioned at all. I think platforms will have to get much better very quickly at articulating why what they do is worth the client’s coin.

And with that, we’re back to cost comparisons and their wily ways. It’s almost as if there were a plan to this article, isn’t it? Anyone who doubts that cost to client is a completely fundamental part of suitability for the FCA – see earlier point on functionality now being mainly commoditised – needs their bumps felt. You can whine and moan as much as you like about BMWs versus KIAs, the price of everything and the value of nothing, or that clients don’t care, or whatever you want, but if you don’t know the total cost of holding a portfolio over time on your chosen platform or platforms, and how that compares to the market generally, you’re not where you should be. No-one says you have to use the cheapest option. Of course they don’t. But where you’re not, you had better be clear, in writing, why your chosen option is firstly more suitable for the client and secondly more suitable for your practice in terms of delivering your well-documented client service proposition than the cheaper options available.

Life’s about to get harder again. Don’t worry. I’m yet to meet an adviser who doesn’t try to do the right thing by his or her clients. But think of this as passing your driving test rather than actually driving – get everything squared away, written down and sorted in a way which helps someone looking into your business from the outside. Once that’s done, you can get on with the important stuff.