"Advisers will be equipped to make an informed decision ensuring all costs, benefits, known and potential risks are analysed and assessed against their pre-defined criteria. This will lead to greater confidence in client outcomes meeting the identified client needs."Â
Not a tick box exercise
More than a simple gathering of information or a tick box exercise, due diligence as the regulator understands it requires careful consideration of the issues, clarity of the adviser firm’s requirements and information gathered and assessed in a consistent manner.
Insufficient interrogation of the data is not going to provide a solid basis on which the firms, or their clients’, requirements can be assessed.
The process of due diligence can be broken down into quantitative analysis, which the industry is comfortable with, and qualitative analysis, which has recently come to the fore.
When the framework for qualitative due diligence is structured correctly, it provides benefits to the adviser firm way beyond anything the regulator requires.
It should be the keystone process within the advisers business ensuring the interface between them and the service providers they select is legally, commercially and operationally sound, leaving them safe in the knowledge they can focus their time and efforts on the most important aspect of the job, looking after clients.
In the initial fact-finding exercise, qualitative research is primarily used to gain an understanding of the core issues including underlying reasons, opinions and motivations.
It provides insights into the situation and helps to develop thoughts and ideas for quantitative research. Â
A questionnaire is often used to start off the process, but with no standard template the industry is currently expending a lot of time and resource, much of it to no material benefit.
Keith Richards, chief executive of the Personal Finance Society (PFS) has said: "There is clearly a demand within our sector for guidance on how best to undertake appropriate and robust research prior to engaging a discretionary investment manager.
"Like the regulator, the Personal Finance Society is focused on raising standards in this area. With increasing numbers of advisers now using discretionary investment managers, it will become increasingly important for them to develop an appropriate due diligence framework in order to limit the associated risks."
What’s in a name?
In order to move forward with qualitative due diligence, putting the terminology used into a regulatory and legal context becomes important.
The following are some examples:
