I often receive communications from discretionary managers with a multitude of badges, ratings and awards displayed prominently and think, sub consciously, ‘That’s nice – somebody likes them’. It gives me a warm feeling about the company, which I suppose is the aim. But what does all this bling actually mean?
Ratings, awards and certification are meant to be easy ways for us to speedily judge a company’s standing – this is why discretionary managers, and others, use them to position their company. When conducting due diligence they can be great short cuts, slashing hours of detailed work in areas which, quite frankly, none of us want to be subject matter experts in. However, over reliance on ratings as a proxy for all research and due diligence is dangerous.
IFA firms have primary responsibility for the advice given to their clients. Saying ‘But they had a five star from so and so.’ won’t aid your defence. If you use tools in your advice process you are responsible for ensuring that you understand how they work and their limitations.
Rating and award badges in particular are simple in design so often don’t always convey the aspect they are rating so you need to understand exactly what the rating or award is assessing – and what it’s not assessing. The first place to look is the criteria that is used – what are the building blocks of the award? This will give you a good sense of the areas the rating covers and the areas you will have to gap fill with your own research.
Once you know which aspect of the service the badge is rating you should then work on understanding how the rating is achieved – is it difficult or easy to get the top grade? Are criteria weighted or do minor criteria have the same effect as essential criteria? For instance, might a firm get the top award simply by making a few trivial changes?.
Another factor to be considered is whether the rating includes a qualitative element. Does the rating firm dive under the bonnet and check that the information they have been given hangs together?
Ratings and awards are neither good nor bad, they are simply tools. Understand what they are for and how to use them, and they will serve you and your clients well. But they will not remove the need to conduct appropriate due diligence for the services you advise clients to use.