Independent financial advisors can decide which companies they want to do business with. However, they need to base their decisions on some form of due diligence.
While regulation requires advisors to conduct a due diligence, the real reason it should be done is because it is central to the care with which professional advisors treat their clients. And, it significantly reduces risk in their businesses.
In its simplest form, due diligence is about gathering sufficient information in order to make informed decisions about the providers and/or products you wish to support. In my opinion, when deciding to do business with a company, there are at least four areas where advisors should be gathering information, namely company, products, service and relationships.
1. Company
The company refers to the fact that you need to gather information about the product provider you want to do business with. Questions to consider include:
• Is the provider regulated or unregulated?
• Who oversees the provider from a regulatory perspective? Because regulated providers offer supervisory peace of mind, many advisors stay away from unregulated providers.
• Is the provider who it claims to be? Who owns the provider? How long has it been around? What is its track record? What is its financial status?
• Has there been any publicity about them, good or bad? A simple Google search will tell you.
2. Products
It is important that you understand how the product works, so that you can explain the risks to the client and also determine whether the product is suitable for your clients’ needs. Ask questions such as:
• What are the product features, benefits, pricing or charging structures?
• Do these features and benefits meet the needs of your business and do they suit your target market?
• Do the provider’s products do what they promise? What is the investment performance track record? What is the claims ratio for risk policies?
• What are the risks attached to the product/fund, for example exclusions on life policies, specific requirements under short-term policies, or risk profiles on investment funds?
3. Service
Does the product provider have the capacity, capability and expertise to deliver?
• Are they client service friendly? What support do they provide - call centre, consultants, online systems, specialist support and access to underwriters?
• What is their service record for new business (risk or investments) and what is their record on post-sale servicing? What are their turnaround times?
• What administrative support and capability do they offer to advisors, e.g. commission/fee reporting, client investment reports?
4. Relationship
Consider how you interact and build a professional business relationship with providers by assessing aspects such as:
• Attitude – do you feel you are valued and your client is central to the provider’s organisational objectives?
• Accessibility – how easy is it to engage with the provider and with specific departments or with management?
• Responsiveness – how quickly and consistently do they respond to queries?
• Openness and transparency – how clearly and understandably do they share information?
• Terms of business – are they balanced between the interests of the client, the provider and the advisor or are they onerous, rigid or one-sided?
• Client relationships – what is their stance on your relationship with your client? Is this respected? How do they communicate with you and your clients?
Due diligence is part of an advisor’s everyday role, but only provides protection if the products applied to the client’s needs are suitable for their circumstances.
I recommend three simple rules of thumb that should help you meet your due diligence requirements and manage the risk in your business:
1. Do not blindly accept what you are told or what you read about a company or product.
2. The further you move away from mainstream regulated providers, the deeper your due diligence investigations need to be.
3. Keep an audit trail of what you did to understand the provider and the product.
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