Retaining independence in the age of due diligence

Advisers have always had to do due diligence - and this obligation was of course formalised and strengthened under the Retail Distribution Review. Under the rules that ushered in the platform rebnate ban, however, the regulator also laid policing of the payment rules at advisers’ doors.

Recently we have seen Nucleus and Standard Life, among others, come out with tools and advice to help advisers meet their new obligations. Nucleus published a white paper warning advisers that platform due diligence is more than research; Standard Life introduced a “bespoke” due diligence service for its wrap.

While providers can only be applauded for offering such help, for many advisers it remains unclear just how much difference the new requirement to ensure platforms are compliant before they place business with them will make to their lives.

Not a level playing field

Outlining how he thinks the new rules will play out in practice, Declan McAndrew, head of investment research at national advisory group Foster Denovo, which supports both independent and restricted advice, says advisers need to ensure platforms are “fit for purpose”.

“Today’s adviser needs to be clear about what a particular platform does, how sustainable is their model and how they despatch their regulatory obligations.”

Philip Martin, marketing manager at Openwork, adds advisers need to ascertain what sort of functionality the platform has and how ‘robust’ it is, as well as assess the platform owner and specifically “how committed they are to the marketplace”.

He says: “Does that platform [have] size and scale or could it be vulnerable?

“Does it have access to the assets we want it to have access to, which is not necessarily the same as how many funds does it have access to? If so, at what price in a clean environment, so will customers be able to access the best deal?

“What sort of backing do they have in terms of administration, how manual is that process or is it automated?

“It’s all these things that you will be identifying in the market place to come up with some sort of conclusion.”

If all of this sounds like the burden placed on advisers is going to increase, importantly it seems this burden will not be as heavy for restricted advice firms or those firms that are appointed representatives, whether restricted or otherwise.

Mr Martin says Openwork, as a restricted network, creates a panel for its advisers to use, which means it undertakes “due diligence centrally, rather than provide support to advisers to do it individually”.

Foster Denovo works with both restricted and independent advisers and has a central platform policy that applies to both. Mr McAndrew adds its ‘advice policy committee’ reads through the business rules and then formulates the policy,“ensuring the regulatory obligations are consistent across the company”.

“Where a platform is deemed to be an appropriate solution, research can then be undertaken for individual clients. This is based on specific objectives and complexity of the client’s circumstances.”

It seems advisers who have this back up and support will not be facing as tough a challenge as those who are directly authorised.

Mr McAndrew says: “I do believe it is harder for independent advisers to undertake this level of work and research, given the majority are unlikely to have the resource in-house.

“Many will have to resort to external policy making functions/support, which - in turn - will have an impact on their bottom line.”

Sheriar Bradbury, managing director of IFA Bradbury Hamilton, agrees: “This will often - although not always - be a simpler process for restricted firms.

“The complication comes where a firm is offering a whole-of-market service as the onus is on the firm to demonstrate that it has carried out sufficient research and due diligence against a sample that is representative of the whole market.”

‘One size fits all’

Independent advisers already have it harder than restricted peers with platform use, after the regulator’s first RDR implementation review warned IFAs may be hard pressed to prove their independence if they are ‘shoe-horning’ clients into one platform.

Although the regulator stopped short of banning IFAs from using just one platform for all their clients, this is an area the FCA will no doubt be keeping its eye on.

Last year, Matthew Walne, managing director of Leicestershire-based Santorini Financial Planning, said he “predominantly” uses a single platform to process client business and intends to continue doing so.

He said his independent status would also require him to look beyond these platforms - or platforms altogether - if he needs to access a product that he cannot find on his chosen provider, but that he can simplify his due diligence demands by having a single default provider for the majority of clients.

While no one is accusing an IFA of any wrong doing if they choose to use a ‘default’ platform, Mark Polson, founder of consultancy the Lang Cat, warns it may be difficult to demonstrate client suitability to the regulator.

“We think independent advisers would be hard pressed to demonstrate that one platform is suitable for every customer from a young accumulator starting out and doing a basic Isa/Sipp combo through to a very high net worth individual with complex decumulation demands.

“If they can demonstrate that suitability, then fine.”

Mr McAndrew does not believe ‘one size fits all’, adding that IFAs should have “no pre-determination” before under-taking research for a client.

“If they operate independently, then they should start with a blank page for each client, with an appreciation of the fact that no two circumstances will be exactly the same.”

Mr Bradbury believes it has always been the case for IFAs to use more than one platform but admits it is only recently that this message has been “properly articulated”.

He says: “Even now some firms refuse to bow to the inevitable and I wouldn’t be at all surprised to see some enforcement action over the next couple of years. It is interesting that in truth most firms who only utilise the one platform (or even two or three), do so largely for their own convenience rather than for the benefit of their clients.”

It seems that restricted advisers do have it easier, but of course it’s never that simple.

As restricted intermediaries are not looking at the whole market market, they do not need to conduct due diligence on all platforms, however they still need to ensure the platform they use is suitable for their clients.

Mr Polson adds: “For restricted advisers, the picture is maybe a little bit easier, but they don’t get off the suitability hook.

“If Platform A is the answer before the question has even been asked, then Platform A has to be broadly suitable for that client, and if it’s not then the client needs to be handed off to another adviser, not shoehorned onto the adviser’s chosen proposition.”

Does the client benefit?

The whole premise of this extra due diligence is to create better transparency for the client - so will this result in better outcomes?

Mr Bradbury says the need for IFAs to carry out whole of market research will put market pressure on platform providers to ensure that their offerings are competitive, and that this could be the primary benefit for clients over the longer term.

He says: “If advisory firms are simply allowed to use one platform for their own convenience this could distort the market as providers will target money at getting firms to adopt the platform rather than by keeping costs to the client down.”

Mr McAndrew says: “The due diligence which needs to be undertaken by advisers is in line with achieving better client outcomes.”

Mr Martin agrees, adding: “Anything that improves adviser understanding of the platform that holds their customers’ assets can only be a good thing.”