How to do due diligence on managed portfolios

    How to do due diligence on managed portfolios

    Due diligence is defined as ‘the care a reasonable person should take before entering into an agreement or a transaction with another party’.

    There is really only good due diligence or inadequate due diligence, there is no inbetween. The key is to satisfy the client, yourself as an adviser and finally the regulator you are doing the right thing.

    Defaqto has published many articles and papers on the subject of due diligence on investment solutions and the truth is, regardless of the investment solution, the due diligence undertaken (the questions to ask) should be similar. It is only the answers that will differ.

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    It could be argued a certain amount of due diligence has already been undertaken to reach the conclusion that a specific investment solution is the most suitable for the client, although usually described as ‘fact find’ or ‘know your client’.

    So, for the purposes of this article, let us assume this element of due diligence has been completed and it has been established that a managed portfolio service (MPS) is the most appropriate solution for the client.

    By MPS portfolio, we mean the portfolio is structured, within a segregated nominee account, for different client segments with clients matched to predetermined portfolios, should their preferences of outcome and risk budgeting match.

    All clients choosing a specific portfolio option will get the same portfolio – there is no investment tailoring for the client. A full suite of investments may not be available in these standardised portfolios.

    General approach

    The most sensible approach is to put yourselves in the client’s shoes and attempt to answer all the questions that they ought to have when considering placing a large amount of money with a third party to look after, with a specific outcome in mind.

    For the adviser’s part, additional questions need to be addressed in ascertaining how the adviser firm relationship with the discretionary fund manager (DFM) is going to progress.

    If push comes to shove a client may ask some fundamental questions, such as are they any good? Do they put my money in anything ‘dodgy’? Am I going to understand what is going on and will I be kept informed? How much will it cost and can I get at my money easily?

    These questions can be translated in to the following categories of analysis:

    • The firm

    • Terms and conditions

    • Service

    • Investment style, philosophy and process

    • Responsibilities

    If satisfied with the answers, this gives the adviser and client firm ground and confidence on which to continue.


    One of the biggest concerns for the regulator is where responsibility for the suitability of the investment lies:

    “Where a firm refers investment selections to a discretionary manager, both the introducing firm and the discretionary management firm have obligations to ensure that a personal recommendation or a decision to trade is suitable for the client.