Platform View: True due diligence

One of the great emerging themes in the past few years has been the requirement for advisers to carry out due diligence on product providers.

The harsh reality is that most of today’s ‘due diligence’ amounts to little more than glorified research, occasionally enriched by some more analysis. In the platform world, questions around the number of assets held, the breadth of tax wrappers and the extent to which the platform might support DFMs are doubtless interesting, but they do not really count as due diligence.

And given the references in PS13/1 and the realisation that advisers must take more accountability for the delivery of their client propositions, it feels like the bar needs to be raised.

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For example, how many advisers are asking searching questions about the technology and operational model of their chosen platforms? It is not unreasonable to ask for documentation relating to platform architecture and then being able to form a plausible view of its credibility.

Where a platform administers its various tax wrappers in different systems or has clear blue water between its tax wrappers’ capability and the trading components, it is not unreasonable to ask further questions on the various checks and balances being run. In fact, loads of clients are signing up to platforms that have operating models anchored in history.

Then there is the business model and the sustainability thereof. How many platforms have simply taken an old world model and dumped it online? The sales and marketing model of the 1990s should have been parked there, as it is unsupportable on today’s margins.

Yet many platforms are still running old world sales and marketing operations in the hope that sufficient scale will emerge to make it all worthwhile. Why not probe platforms on their cost of sales – and don’t accept any actuarial mumbo jumbo about embedded value; just ask for the all-in cost of the sales team divided by inflows for each of the past three years. The answers might just range from 7-40bps and in turn may provide a clue about the sustainability of each platform’s business model.

Altus, which is a consultancy, did a great report in the summer questioning some of the economics and it is possibly essential reading as you formulate a due-diligence strategy. Seems that platforms have between £5m and £70m assets under administration per employee. Even after allowing for different outsourcing models, this is an extraordinarily wide range and again gives some insight into sustainability.

After all, everyone needs to generate a return on equity and if the business model doesn’t work the only people paying for it in the long run are going to be you and your clients.

Try to get hold of some analysts’ reports on the listed companies. You’ll make some startling observations. Even before that, maybe see if you can gain proper access to senior management to eke out some answers to queries.