Completing Your Due Diligence

PROFESSIONAL INVESTOR: In this post-RDR world, financial advisers must be even more careful and responsive when it comes to completing due diligence

Anastasia Georgiou 26 February, 2013 | 6:00AM
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This video is part of an on-going series of articles and videos tailored specifically for professional investors and financial advisers. 


Anastasia Georgiou: I'm here with Mel Holman of Compliance and Training Solutions, and we're going to be talking about due diligence.

Hi, Mel.

Melanie Holman: Hi.

Georgiou: So, what are the advisers’ responsibilities when it comes to due diligence?

Holman: I think that the main lessons we have learned from the Arch Cru compensation paper, for example, is that it is very clear that it's the adviser's responsibility to make sure that they understand the fund that they're recommending or the product they are recommending. They really need to get underneath the bonnet of the product and challenge the provider, the fund manager, as to how that product works and what are the risks to that product.

Georgiou: So, what do they need to do to enable them to make those challenges?

Holman: They need to be able to identify the questions -- like read the product literature or the fund literature and ask for training, if necessary, or some more information. Just basically, their responsibility is to make sure they truly understand that product. So that when they're delivering it to the client, they can put it across effectively and put the client into an informed position. If an adviser doesn't understand the product, then they shouldn't be recommending it at all.

Georgiou: So, if they think something is not quite right then…?

Holman: Avoid it or challenge it. Advisers can obviously use a third-party, such as Morningstar, which is absolutely right. They just need to be comfortable that the third-party they are using is competent to do the job. But what they can't do is they can't delegate the responsibility or the suitability of that product or fund. They ultimately know their client and have done the risk profiling and all the rest of it. Only they can make that assessment as to whether that fund of product is suitable for that client.

Georgiou: How should they document the due diligence?

Holman: Yeah, it's a good question. Basically, suppose you’ve got a brand new fund, for example, really some funds are building out some kind of questionnaires and you can get that from a range of sources really. Sending it out to the fund managers or asking for their due diligence document, and it's analyzing that against all the product literature or fund literature and then getting people in and speaking, coordinate it down, and just keeping it in a centralised place, and making sure that if it's a large firm and it's a fund that you're saying is in your portfolio, for example, that all the advisers understand what impact that has on that portfolio and document the training within it. So, it all comes down to systems and controls and procedures.

Georgiou: In terms of sort of due diligence, where do you think most advisers have problems?

Holman: I think…

Georgiou: Or what's the most common problem?

Holman: What's the most common problem? I think it's not recording. I think it is more about, they've had some literature or been to some seminar, for example, and think ‘that's quite good’. They look into it. But when it comes to a complaint, they can't evidence who they've spoken to and what training they attended and what the literature was and the key features they got rid off ages ago. And we're in a world now where you just have to have all the evidences there, no matter how old it is or what the product is.

Georgiou: Okay, well, I think that's all we've got time for, but thank you very much

Holman: You're welcome.

Georgiou: I hope you found that interesting. Thank you for watching.

Morningstar offers products and services for financial advisers including Morningstar Adviser Workstation, the multi-award winning practice and portfolio management system for financial advisers. Click here to learn more about this all-inclusive platform designed to support core aspects of your business in an RDR world.

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About Author

Anastasia Georgiou  is the product manager for Adviser Workstation in the UK.

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