Regulatory due diligence is more than just a checklist.
It can often be the difference between a green light and a red light for prospective purchases of financial advice companies.
If findings are poor, this can reduce the purchase price or, more likely, scupper the deal altogether if they cast doubt on the culture at the target company.
In this article, I will explain what acquirers typically look for when we are asked to conduct regulatory due diligence for purchasers of advice businesses.
I will also suggest how you could prepare for the due diligence process before putting your business up for sale.
Broadly speaking, there are several things we tend to focus our due diligence on.
The first is quality of the target company’s advice and advisers.
For any potential acquirer, the quality of advice given to clients by an advice business has got to be the main focus for any regulatory due diligence process.
If the advisers are being retained, the purchaser will also want an indication about how good they are individually.
We test these things by thoroughly reviewing a sample of client files to assess whether they demonstrate that the advice was suitable, and that the client could make an informed decision.
The more advisers and offices the target company has, the more client files we will review.
When we select our sample, we will usually cover all the advisers and a broad spread of the types of advice the company offers.
- Regulatory due diligence can scupper a deal when buying an adviser business
- Poorly structured reports can create a bad impression of your company's standards
- Regulatory due diligence is normally a high-level and time-constrained exercise
But we will also aim to include some higher-risk cases within our sample; for example, defined benefit pension transfers, any specialist higher-risk investments (such as enterprise investment scheme cases), equity release, pension switches, structured investment products, and so on.
What can you do to prepare for such a review of your client files? I suggest challenging yourself with a few questions, such as:
• How easy is it for an external reviewer to navigate and make sense of your client files? Is all the suitability-related client information readily accessible and in a logical order, or is it haphazardly scattered all over the place?
• When was the last time an independent suitability specialist reviewed a sample of your client files?
• Do you know how well they would stand up to external scrutiny, especially any DB pension transfers or other high-risk cases?
• Do you conduct internal suitability checks and, if so, do you have evidence to show how you use the results to share best practice and drive up standards among your advisers?
• How good are your suitability reports, and what could you do to improve them?
This is one area where we see huge differences in quality between companies.
Well-written and tailored reports that clearly and concisely explain why your recommendations are suitable for clients’ individual circumstances and objectives will inspire a lot of confidence in the quality of your advice, as well as the professionalism of your advisers.