What is your approach to due diligence? Due diligence involves collecting all the relevant information needed to assess a particular product, platform, fund or service. If you have a process that works, it can be applied to all those things, and more, so the importance to the business of getting it right cannot be overstated.
While the focus of due diligence may be on financial planners and advisers doing the right thing, it is important not to overlook the importance of the paraplanner in the process. Paraplanners often play a fundamental role in the research and analysis functions within financial planning firms. Some might argue that due diligence is just good practice, and in many ways that is true. Any recommendation needs to be well researched and assessed so as to ensure that its use can be justified both in the present and in the future, in the event of things going wrong. And this is just as important for justifying why you have decided not to do something. This can only be done if proper checks have been done from the start, with information gathered, verified and stored – and crucially, fact separated from opinion. These things should happen not simply to tick a box for compliance purposes, but because they are in clients’ interests. Due diligence is about doing everything you can with the information available to make decisions that will help you to achieve the best possible outcome for clients.
Good practice in this area includes a healthy degree of professional scepticism. It is not enough to gather all the information available and accept it at face value. Marketing literature needs particular care. When extending it to any independent validation of the information, this, too, needs to be considered thoroughly. Any third party endorsement is helpful, but it is important to understand the basis on which the endorsement was given and the credentials of anyone making judgements.
Carrying out effective due diligence – and it does not matter on what – requires strong research and analytical skills, coupled with the ability to question all the information, as well as the determination to keep on checking until everything stacks up. These are essential skills for paraplanners. This was borne out by the IFP’s paraplanner survey showing that more than 30 per cent of respondents said the due diligence in their firm was carried out by paraplanners alone, and almost 50 per cent saying it was done by planners and paraplanners together.
Taking this a step further, many paraplanners are actively involved in working out their firm’s approach or strategy – or their clients’ approach if the service is outsourced – to risk management more widely. Having a robust process that can be applied across the business, irrespective of what you are doing due diligence on, can significantly contribute to the lowering of overall business risk. Paraplanners have just as much to contribute to the creation and implementation of a due diligence framework as they do to carrying out the due diligence itself. Getting involved from the very beginning can make the difference between an acceptable approach and an excellent one.
Ultimately, while due diligence plays a part in reducing risk, it is about doing the best for clients. When things go wrong – and they will, because that is reality – clients, and possibly Fos, will be owed an explanation. If any aspect of the due diligence process is below par, it will be far harder to provide that explanation. Being able to show that due diligence was designed and carried out by the people best suited to it makes sense for the business and for clients.
Sue Whitbread is communications director of the Institute of Financial Planning
