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Assessing suitability: Research and due diligence of products and services

Assessing suitability: Research and due diligence of products and services

Advisers know that suitability lies at the heart of good advice – identifying the client’s real needs and then identifying the best solutions. And identifying those best solutions requires good market knowledge, based on research and underpinned by due diligence to ensure that the solutions will deliver as expected.

So what comprises appropriate research and due diligence? The FCA undertook a thematic review of adviser practice in TR16/1, published in February 2016, looking at (amongst other things) how advisers selected discretionary investment managers and setting out examples of good and poor practice. They undertook the project because, they said, previous work had shown that:

“the poor quality of an advisory firm’s research and due diligence is one of the three root causes for poor consumer outcomes.”

“Research and due diligence” was defined in the paper as:

“the process carried out by the firm to assess (a) the nature of the investment , (b) its risks and benefits and (c) the provider (to establish whether they believe it appropriate to entrust the provider with client assets).”

And then followed the punchline:

“The firm needs to understand these factors in order to judge whether the solution is suitable.”

So the FCA are clear that an adviser must understand the nature, risks and benefits of an investment product or service and, equally, consider the credentials of the provider before a recommendation can be made.

Reaching that level of understanding involves considerable thought and investigation, thinking through potential risks and asking appropriate questions, then reviewing and challenging the answers received. Failing to ask the right questions could lead to missing something important. And comparing different firms means asking the same questions of each firm and carefully considering their responses.

This doesn’t mean “reinventing the wheel”, though – in the world of discretionary investment management, there’s a central library of questions advisers can draw on and a range of pre-built question sets to assemble answers quickly.

The adviser still needs to think through what’s important to the client and the firm, and identify particular areas of concern, but modern online tools can make the process much more straightforward, enabling smaller firms to compete on level terms, demonstrating commitment to good practice and putting clients’ best interests at heart.

Chris Jones

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