What can firms do about this? While nobody can predict with complete accuracy which companies will or will not fail in future, due diligence can help advisers avoid problematic areas.
Some of this comes down to the basics, including assessing a provider’s financial strength. Given that many platforms are owned by parent entities, this could require a deep dive on the part of the adviser.
“Financial stability is fundamental, as are profits,” says Les Conway, of adviser firm Essentially Financial. “The problem that we have got is platforms are operated by large providers, which fudges things.”
However, the behaviour of a firm, and its compliance track record, can also give an indication of whether future problems are brewing. Ian Cornwall, director of regulation at the Personal Investment Management and Financial Advice Association, notes that it is often firms focusing on esoteric assets that tend to face problems later on.
Beaufort Securities, for example, focused in part on the likes of illiquid and unregulated assets. This meant that an independent valuation of its assets ended with these being marked down from an initial value of £850m to £500m because some holdings turned out to be illiquid or of “nil value”, according to PwC.
“Some of the investments were unregulated and illiquid, which, coupled with the firm being charged with fraud by US prosecutors, is making it much more costly for the administrator to unwind the mess,” says Mr Modray.
“Providers with lots of complicated products are more likely to create bigger problems if they go under,” adds Mr Okusanya.
More generally, a company’s background can be telling. Mr Cornwall believes advisers should focus on previous activity and look for any historic scrapes with the likes of consumers or regulators.
“What’s their financial situation?” he asks. “What’s their reputation in the market? What’s their regulatory background? Who are their auditors?”
Similarly, those probing a company’s history could ask how many FCA visits the business has had in recent years, and the findings of these. They could also ask about Financial Ombudsman Service complaints and their outcome.
Changes could be coming in the wake of the Beaufort Securities debacle. A petition put forward by investor Nandish Haria, detailed in Box 2, demands that the government revise legislation to stop administrators taking fees from client assets. The government will respond to the petition, which is open until 27 December, if it garners 10,000 signatures.
