Due diligence of an investment platform is a familiar undertaking, but the consumer duty is now an additional consideration in the process.
The need for due diligence is nothing new, agrees Chris Jones, director of DD Hub, a resource for conducting due diligence on platforms, and is inherent in principles two and six of the FCA handbook, but the duty has given it new force, he says.
“The rules require advisers to look along the distribution chain when considering foreseeable harm, so they need to think about the implications of using a particular provider.”
Indeed, due diligence is all about thinking about what might go wrong, says Jones, and checking that you are comfortable that appropriate protections are in place.
He also highlights a difference to researching the market, looking at features, options and financial strength ratings.
“It’s simply not enough to check whether the platform’s charges are reasonable, their AKG rating is okay and whether they have an Isa or offshore bond,” says Jones. “Advisers need to think about what foreseeable harms might arise, delving deeply into the provider, including its governance, controls and procedures.”
Some of the risks associated with using a platform that Jones lists are as follows:
- Technology and operational resilience.
- Transfer times and processes.
- Fair value and disclosure of fees and charges.
- Interest on cash, in relation to fair value.
- Fraud and cyber attacks.
- Due diligence of non-standard assets.
Advisers therefore need to engage directly with the provider and ask the right questions, typically by issuing a due diligence questionnaire, says Jones.
“They then need to get the responses in an easy-to-compare format and devise some kind of scoring system – what does ‘good’ look like? What is not suitable for this client segment?”
Segmenting a client bank into the main types of clients will make platform selection easier, says William Moss, an analyst at research consultancy Platforum.
Indeed, many advice firms will have a centralised investment proposition that aligns with their client segmentation, and be looking for platforms that support this, but Moss adds that other factors may cut across a firm’s client segmentation, such as platforms that offer a family linking discount, which may be better for clients engaging in intergenerational planning.
Similarly, Moss says that platform rate cards may not reflect the actual fees paid by advisers’ clients, and so rate card calculators and generic comparisons cannot be relied on.
He suggests ‘shopping’ clients’ portfolios to platforms to see what bespoke deals are available, with large portfolios and pension business being the most attractive.
“We have heard of advisers not knowing their firm has discounted rates on their existing platforms, so it is always good to check this with the platform when conducting due diligence,” Moss adds.
As well as fees and charges, Darren Winfield, a wealth insight analyst at Defaqto, suggests considering the following:
- Product range: do they offer a range of wrappers and investments suitable for the particular client segment?
- User experience: is the platform user-friendly and intuitive for the adviser and consumer, with effective tools to help with planning that enhance the consumer experience, whether that be understanding or cost-related?
- Security and technology: how does the platform handle data security, and is it updated regularly and reliable?
- Customer support: does it have a responsive support team and multiple contact channels?
During the due diligence process, Winfield also recommends thinking about seeking input from peers, conducting client surveys, and reviewing industry publications and reports to gather insights into the platform’s reputation and performance.
