Advisers deciding to outsource some, or all, of their clients to managed portfolio services and discretionary fund managers, will need to be assured their clients’ money is in safe hands.
Therefore it is key to make sure there is proper due diligence carried out on the discretionary fund manager (DFM) itself.
This is not just a nice-to-have; it's a regulatory requirement and, as such, can be an onerous task to make sure that it is done right.
One only has to think of the FCA’s thematic reviews of recent years. For example, in February 2016, the City Watchdog published TR16/1: Assessing suitability: Research and due diligence of products and services.
According to the regulator, this was borne out of research into how well advisory firms researched the investment services before recommending them to clients.
The thematic review stated: "We considered how they review the market and ensure they recommend suitable solutions for retail clients."
This included, for example, exploring how:
* Firms selected products, funds, platforms and discretionary investment management services.
* Firms created panels and centralised investment propositions (CIPs).
* Firms considered options for individual clients.
While the regulator found most advisory firms were doing a good job in terms of due diligence on third-party firms, others were lacking in their duty of care to the end client in this regard.
At the time, Linda Woodall, who was then the director of life insurance and financial advice at the FCA, said: “Research and due diligence is one of the three pillars of getting advice right, which is why we have returned to this issue.
“Firms clearly want to get this right and all firms, regardless of size or type, can carry out good research and due diligence.
“However, there are still improvements firms need to make and we’d encourage all firms to look at our findings and ensure they are challenging themselves to ensure they’re delivering quality due diligence for their clients.”
For many advisers, fears they could be on the receiving end of regulatory enforcement if they do not fulfil their due diligence obligations could be considered a huge disincentive to outsourcing.
However, due diligence is vital to the ongoing relationship, as Rohit Narang, chief operating officer for Intelenet Global Services highlights: “Advisers need to know the [firm to which they outsource] is financially stable and will be a reliable partner.”
Due diligence is also a necessary burden in order to protect clients in the event of anything going wrong with the firm to which advisers have outsourced.
The importance of checking and double-checking was underscored last year, when the FCA removed the permissions of one DFM, Analyst Investment Management Plc.
In August 2016, Analyst was found to have “failed to pay fees and levies to the FCA, despite repeated FCA requests that it do so”. The note can be found on the FCA register of companies.