How can you make sure you have constructed a robust process within your financial planning business for platform due diligence? Mark Polson of the lang cat, takes a practical look at the dos and don’ts of getting this key decision right
You know how when you stare at certain words for long enough, they stop looking like real words? That’s how I feel about the phrase ‘due diligence’. We’ve all said it so many times that it’s sort of lost meaning and now is just a sort of shorthand for ‘picking stuff to use’, or also ‘a pain in the ass’.
So in this piece I thought we might try and reconnect with the process and remember what it’s all about. Before I get going, it’s instructive to remember that what we’re talking about when picking a platform or a DFM or whatever isn’t due diligence as it exists in, like, the proper world. That’s a process that companies go through before investing in or buying other companies, and if advisers had to go to that depth on pretty much anything you’d all be shutting up shop.
- So let’s address a few common misconceptions, and then get into how to construct a decent due diligence process. Here are some things that you don’t have to do:
- You don’t have to do an in-depth assessment of every provider in the market. If there are propositions that are obviously unsuitable then it’s fine to discount them (but keep a note that you’ve done that).
- You don’t have to create a 200-page monster.
- You don’t have to pick the cheapest. Something that’s cheap and unsuitable is still unsuitable.
- You don’t have to do huge tick-sheet grids of functionality. Most platform functionality has little or nothing to do with client suitability.
- You don’t have to insert a mini DD pack into every suitability report.
- Outsource your DD. It’s perfectly feasible to do it yourself.
And here are some things I reckon you do have to do:
- Record every decision you make. If you think that Platform A is plainly unsuitable because it smells of fish or something, then WRITE IT DOWN.
- Make sure to do the exercise for each client segment you have. What works for one won’t necessarily work for another.
- Have proper rationales. The fish thing in point 1 was a joke. Here are some things that aren’t reasonable to discount platforms on the basis of:
- They’re going to nick my clients
- I only want platforms with over £xx bn
- I don’t like life companies
- The BDM flirted with my wife at the last golf day
- Document your sources. If you use, for example a fine resource like the lang cat’s free Platform Directory (langcatfinancial.com/platform-directory) then keep a note of that. It’s fine to use free resources as long as you satisfy yourself that they’re up to date. Ours is.
- Be wary of providers’ own DD documents. Most are brochures in hiding. They’re sometimes good for stats though.
- Make it a formal document.
- Discuss it and adopt it formally at a board meeting.
- Have a named owner for the document and ideally have its maintenance as part of documented objectives for that owner (this helps show you’re taking it seriously)
- Refresh it periodically – about 12-18 months should be fine, or when there’s a big change in the market.
There are probably more, but that’ll do for now.
In one sense, the lang cat house view on DD is that it can now really be boiled down to two questions. Here they are:
- Is this platform a secure home for my clients’ investments?
- Does it allow me to deliver my service proposition to my clients and fulfil their financial plan?
I didn’t say they were easy questions. As you pull at each one you will inevitably end up with lots of sub-questions, and they’re valuable. It’s by aligning the things you ask platforms to these two areas that you’ll ensure you’re concentrating on suitability; you’ll stick to your agenda and not the agenda of a provider, or someone else.
Let the fun begin
Once you’re ready to start, here’s how we do it. We start with a clear definition of the client segment we’re looking at, and a list of requirements (there is proper work involved in this; it’s actually the hardest part of the process). We mark these as ‘adviser’ or ‘client’ – cool back office integration is something you care about; price or a client mobile app is something a client might care about. Each set needs to be ranked as high/medium/low-or-nice-to-have. This will be important later. Group your client highs and adviser highs together, client mediums and adviser mediums and so on.
What we’re going to do is operate a sort of ‘pass’ structure. We’ll go through the market once for the highs, and knock a load of providers out. Then it’s the mediums, and then the lows.
Make a list
So you’ll need a list of all the providers in the market. If you don’t have one you can find it on our website. Once we’ve got that, you can start measuring providers against your requirements. This is where you’ll either have had to do a load of primary research or use secondary sources like the lang cat’s platform directory (others are available but they’re not as good, obviously).
You should resist a binary answer for each requirement. Platforms are far too nuanced; they resist easy classification. We like to use the venerable Harvey Ball method; you might score from 1-4 or something like that. If you do, and 4 is good / 1 is bad, then you can tot up scores once you’re finished with the highs. You need to draw a line at this stage and knock a load of companies out. Be brutal. Don’t have any more than, say, 12 or 15 left at this stage or you’ll go crazy. If you’re unsure if someone should go through, look at the balance of client and adviser requirements. If they’re deficient on the client side – bin them. If they’re missing a few things you’d like but they do a decent job for the client – keep them.
Whittle it down
I should mention that the whole market list can be winnowed down if you have really clear reasons for not using someone. So, for example, if your model portfolios use ETFs, you can just knock out any platforms that don’t offer them. No point in including them at all. Just document it.
OK, so now we have a reduced pool. It’s time for the mediums. You’d hope to get rid of another 5 or 6 here. Then repeat for the low or nice-to-have stuff. At the end of this process you should have a shortlist of no more than 4 or 5 platforms – and maybe even fewer.
Time for a deep dive
Once you’ve got a short list, it’s time for a deep dive. In our DD work, this is when we start contacting platforms with specific things we might want to know. This could include details of any special pricing deals we might be trying to negotiate on the adviser’s behalf, or any bespoke requirements. Oftentimes we’ll have quite detailed process questions – it’s a great idea to get administrators from your practice involved.
That point about only contacting a few platforms is really important. I’ve seen many firms send 400 question Excel sheets to 20 providers. Even if they agree to fill them out, what are you going to do with 8,000 data points? Nothing, that’s what. So don’t bother. Use resources, and only bother the platforms with the stuff you can’t find out. It’s fairer on them, and will get you better quality answers.
So as long as you follow this process, and write down every decision you make (‘we discounted Platform B on the basis that in comparison to Platforms C, D and E it requires too much paper-based confirmation for commencing drawdown, which we believe will delay income to clients and will be frustrating for them.’) then you’ll be in good shape. We normally find that there are either one or two clear winners. We don’t normally play platforms off against each other on price; that’s bush league stuff. Find who you really want to use, and if you have a commercial case then go into a negotiation with a genuine intention to use that kit if the price is right. Again, it’s a fairer way to do business.
This process, done right, will probably take you 5-10 working days. We do it a little quicker because we’re used to it, but it is time-consuming if not actually the hardest thing in the world to do right. I don’t think you can rely on a system to give you the answer, before you look for short-cuts, but some of the systems out there can be useful resources for proposition detail.
In the end, what the regulator wants is evidence of a structured thought process and a mind at work. It’s fine for your business to have views, and needs, and to bring them to the process. But the client suitability aspect has to trump everything else, and so in your documentation you must present it in that way.
So there you go. I don’t know if this is the best way to do DD, but it’s how we do it and it seems to work. Go forth and be diligent.
About Mark Polson
Mark is the founder and principal of the lang cat, a specialist platforms, pensions and investment consultancy. The lang cat works with platforms, life companies, fund managers and large advisory firms helping them develop new propositions, turn marketing strategy into action and articulate their services in such a way that people without a financial services degree have a hope of understanding them. Bit by bit it aims to make the industry just a little less corporate and a little more human.
Mark is a prolific writer, contributor to the trade press and public speaker, even when people ask him not to be. He doesn’t play guitar as much as he’d like and spends more time than is reasonable going to gigs aimed at people considerably younger and more tattooed than him.
Follow Mark on Twitter @theactualpolson