How to get the due diligence right

According to the Financial Conduct Authority’s interim Investment Platforms Market Study, adviser platforms collectively administer £311bn.

“There are over 20 adviser platforms in the market, so when it comes to due diligence reducing this down to a workable shortlist requires a bit of effort,” says Barry Neilson, chief customer officer at Nucleus.

Essentially advisers will want to be sure that the platform they’re recommending is right for their clients Barry Neilson, Nucleus

“Each firm will have their own approach, but essentially advisers will want to be sure that the platform they’re recommending is right for their clients.

“It’s worth thinking about how often platform due diligence is carried out within your firm, and whether this is in proportion to how your business may be changing and growing.” 

At the forefront of advisers’ minds at the moment is Mifid II and, most specifically, the Product Intervention and Product Governance rules (PROD).

The rules, which are part of the regulator’s ‘target market’ initiative, say that for each product, investment firms must identify a potential target market and client type it would be most suitable for.

The Lang Cat’s consulting director, Steven Nelson, explains that a consistent theme among adviser firms when it comes to due diligence is the lack of clarity around what best practice looks like.

“The dominant theme at the moment is the lack of understanding of how best to comply with new PROD regulation. We reckon some meaningful, detailed examples would have helped adviser firms, but we are where we are,” he says.

“At a very high level, taking all regulatory obligations into account, if adviser firms are segmenting their client base (and the number of segments can be one if you target a specific demographic), mapping these to products and services deemed suitable – both platform and investment proposition – and documenting why this is to be the case, advisers will be on the front foot.”

Mr Nelson adds, however, that advisers should not be “fooled by those that say platforms are all the same”.

“Taking one area as an example, how to facilitate a withdrawal strategy, then there are scores of differences in core functionality from platform to platform. Researching, understanding and documenting these differences is the key to good due diligence,” he adds.

However, in its latest UK Adviser Platforms report, Platforum found that many firms view PROD as a ‘tick-box exercise’ that is not as diligent as what they have always done.

Andrew Ashwood, senior analyst at Platforum, says: “Despite pressure from the regulator, many firms don’t actively segment their clients, viewing PROD as a box-ticking exercise that’s weaker than what they’ve always done on an individual basis.”

Many advisers operate a panel of platforms and pick the one that is most suitable for each client, says Mr Ashwood.

“And while platform panels might be reviewed regularly, very few advisers will [bulk] switch clients from a platform that’s fallen off a panel. When asked how long they expect a client to remain on a chosen platform, the most popular answer from advisers was ‘indefinitely’. Assets can be very sticky indeed.”

Advisers should be performing due diligence on their selected platforms at least annually Ben Hammond, Altus

According to Ben Hammond, principal consultant at Altus, conflict of interest is another key focus area for the City watchdog, with advisers expected to ensure any provision of tools and services is appropriate for their needs when servicing their customers.

He explains: “An adviser should always have TR16/1 in the back of their mind, and ensure their platform is able to meet their regulatory requirement to effectively service their customers.

“Advisers should be performing due diligence on their selected platforms at least annually and thinking about a fuller review of the platforms they use every two to three years. Core questions will include anything from ensuring the firm is solvent, to their tone of voice when speaking to customers (if indeed they do this),” he said.

7IM’s head of intermediary, Verona Kenny, agrees that key questions should be around the financial stability of the platform, but says prior to carrying out their due diligence must consider what they need from a provider.

“The advisory firm should map out exactly what they need to support their client proposition and also their operational flows, out of this the firm can then ask the right due diligence questions to ensure that the platform can support exactly what they need,” she says.

“In addition to the above, other key questions should be around the financial stability of the platform (AuM, profitability, margins), as well as the strength of the custodian, who is ultimately the entity which is holding their clients assets.

“This should also include, questions on data protection, platform security and extent of support provided for MIFID II and other regulation requirements.”

Jenny Turton is a freelance journalist