The Timebank owner and head of development Damian Davies discusses meeting both adviser and client needs as part of your wider due diligence process.

Richard III has had a seriously bad rub from the history books.

He was the last of the Plantagenet kings, and the last King of England to be killed in battle when he was slain at the Battle of Bosworth.

The thing is, if Richard III had picked his partners a bit better, he may not have lost the battle. He might also have had more of a chance to influence history to favour him a bit more.

I’ll explain what I mean (and what this all has to do with due diligence).

A brief history lesson

At the Battle of Bosworth, Richard’s army outnumbered Henry VII’s and he decided to group his army into three. One part under his command, one under the Duke of Norfolk and the third under the Earl of Northumberland.

Norfolk led the attack but struggled. Units started to flee the battleground, so Richard told Northumberland to go and get stuck in. But Northumberland ignored Richard’s order and did nothing.

Risking everything, Richard decided to go piling in on his own, which cost him the battle, the throne and ultimately his life.

Richard trusted Northumberland to be there when he needed him, and he clearly shouldn’t have.

This is a very similar situation to every adviser business today (seamless link I know).

Clients need two things to do business with you.

They need to like you and they need to trust you.

Likeability is not something you control; it’s just about being yourself. You are likeable to people who like the sort of person you are.

Trust, however, is earned. It is earned by delivering what you promise.

Each time you make a personal recommendation to a client that relies on a product, you are risking that hard-earned trust on the provider.

That company can’t let you or your client down. If they do, they immediately evaporate part of the trust you have spent years developing.

That’s why I believe due diligence is the one part of an advice business that should be conducted entirely selfishly, with the adviser putting their interests first.

Before the compliance uproar gets going, arguing that the client should be at the heart of every decision, I don’t disagree. But when due diligence is done properly it is right to be selfish, to put yourself first, as it will create the best outcome for your clients too.

This will only work though with due diligence being one stage of a wider process, and one that needs to be approached in the right order.

Stage 1 – Client segmentation

Segmentation is a whole other article in itself, but the essence of it is you identify clients that can be grouped together with shared investment needs and characteristics.

The biggest mistake we see here is where some advisers blur their use (or understanding) of the word segmentation with their service propositions.

In the old world, there was a lot of talk of ‘gold, silver and bronze’ segments, usually linked to the value of assets.

Service propositions and segmentation are very different things, even if some bits, like value of assets, overlap.

Our guidance is that segmentation is actually a matrix of different investment requirements, so firms can have lots and lots of segments.

Once you have clear segments, you can understand what those segments need from a product, and you can then compare the meerkat of similar products.

Stage 2 – Comparative research

When you enter the research stage, you have the whole available market of products to review.

Research is about assessing how a product’s investment features can be used to help deliver your service proposition to a stated client segment.

You will essentially filter down from the whole market to those products and features that match the needs of your clients.

The biggest mistake firms can make here is not having enough research to support expressions like ‘my preferred platform’ or ‘my favourite DFM’.

These sorts of expressions suggest that every client you deal with that goes on the platform or under the DFM is the same. Clearly, this is impossible and will have regulators tearing their hair out.

Importantly, research doesn’t have to result in just one product or provider. Instead, good research for each segment will help identify the most appropriate products.

Once you have a shortlist, this is where PROD comes in.

Stage 3 – PROD

PROD (or more formally, the FCA’s Product Intervention and Product Governance rules) is a bit like research but focuses on characteristics rather than features.

If you do this after the comparative research it’s much less onerous, as you’re not using it to compare every product. Instead, you’re using it as a sense check on the results of your research.

It’s a bit like those shape sorting toys for toddlers – you use PROD to make sure everything fits together. You might come away with the same number of products in the shortlist as you did at the end of the comparative research, or PROD may help filter the shortlist down further.

Stage 4 – Due diligence

Having done the comparative research and the PROD sense check, you should now have a shortlist of products that might all be perfectly good for clients in different segments.

Due diligence is the analysis of the organisation providing the product to consider its effectiveness as a business.

Looked at this way, due diligence is nothing to do with functionality or tax wrappers (that satisfy client needs), but rather how the business is built.

For example:

- What does its business continuity plan look like?

- How are senior executives paid?

- What is staff turnover like?

- What are their accounts like?

By taking this approach, we helped a firm identify a provider that had County Court Judgements listed against them.

Everything turned out to be perfectly innocent, but imagine if it wasn’t? That firm could have carried on recommending a provider that, in the worse-case scenario, went under.

The work done in this due diligence stage will help you understand how well you can maintain your reputation. In turn, it will also mean clients are getting a good outcome.

Overall, approaching a centralised investment proposition (CIP) process in this way means you’re putting the client at the heart of the decision. It’s why I believe (when it comes to due diligence) advisers can and should be selfish.

We’ve been helping firms build their CIP processes and carry out research and due diligence for 20 years. I actually wrote my first article on due diligence back in 2013.

The biggest mistake we see here is firms trying to do due diligence BEFORE the research has been done.

If every product in your shortlist can do the same thing, you need to decide which company providing those products most deserves your trust.

To be fair, up until 2018 it was hard to know this was required as there was no legislation to follow, just ‘good practice’ ideas shared by the regulator.

Since then however, with the introduction of MiFID II and PROD rules, it’s a clear as a whistle.

The regulations have really helped advisers reduce their systemic risks, and have set out clear expectations from the FCA – so the regulator is unlikely to be forgiving if you get it wrong.

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