Does the wealth management industry need a standardised way to carry out the due diligence necessary for picking funds? The author of this article takes a look.

An important part of what wealth advisors do is decide which funds make it to any recommended lists. Managers need to test funds to be sure that they are satisfied. So what kind of due diligence is needed to ensure funds get on the menu, and what are common mistakes to avoid? In this article, Eric Dickinson, a figure who has worked with asset and wealth managers for decades, shares his thoughts. 

The editors are pleased to share these insights and invite readers to respond. They do not necessarily endorse all views of guest writers. (For more details on the author, see below). To contact the editor, email tom.burroughes@wealthbriefing.com

When you reflect on your funds due diligence process do you or your colleagues ever think – is our process robust? Do we ask all the right questions in the right way? Are they framed in a clear concise and unambiguous way? Are they complete and up to date? Are there things missing which I need to know about?

Or following a meeting with a fund manager – on reflection, did we get an answer to the question we actually asked?

If you do, then the chances are that you are not alone. Despite firms having existing due diligence processes, and close relationships with the fund managers, they recognise the need to significantly improve the levels of due diligence they perform.

Most firms have established processes for undertaking due diligence on funds they wish to include in their “house lists”, or in re-visiting funds that are already in use by their clients. They have established close relationships with fund managers, which involve both meeting the manager and issuing due diligence questionnaires or requests for proposal (“RFPs”).

Firms may rely on the information that the fund manager provides as standard, rather than answering a specific set of standard due diligence questions. This makes it almost impossible to undertake a thorough like-for-like comparison between funds, as the fund manager will have provided information that shows its funds in the best light. This can often also be true when ‘meeting the manager’ who may want to emphasise the strengths of their fund – often without immediate realisation by the recipient that that is what is happening.

There is a growing realisation that complete and thorough due diligence is needed, partially driven by MIFID ll and the regulator (reference to TR16/1), but also by internal compliance teams who see data gaps, inconsistent data collection and ambiguous questioning.

Fund managers want a standard but end up complying with their client requests answering the same questions phrased slightly differently in bespoke questionnaires leading to a delay in submitting replies, with much resource and effort used to complete bespoke questionnaires. 

Further, how does the firm know that it has asked all the right questions in the right way to arrive at the right assessment of the fund? 

In summary, bespoke due diligence questionnaires are inefficient, they are:

-- difficult to use when undertaking like for like comparison – the need for field-based analysis; 

-- open to interpretation of general questions, inviting spin from the fund provider; 

-- time consuming when completing RFPs, resource intensive for fund providers, causing delays for clients in receiving their information; 

-- required to keep information up to date, information updates are generally infrequent and may be undertaken every six months or every year; and 

-- repetitive with bespoke questionnaires asking the same questions slightly differently.

Amery Thomas, markets director at AssetQ says: “There is an urgent need for a `golden-source’ of comprehensive due diligence information available in a consistent standard format. This data needs to be defined by the fund buyer market, ensuring that it meets their needs and not the disclosure remit of the fund provider. This would streamline the task with the fund managers and ease the digestion of the data by the fund buyers. The information needs to be available, in a timely manner, on any fund of interest to the fund buyer, in order that there is no unnecessary delay in obtaining the relevant information.”

Complete and accurate due diligence information augments suitability processes, fund selections and helps to better prepare for fund manager meetings - making for more informed conversations.

“An industry-wide initiative is taking place, using technology to do the heavy lifting, to gather all information and documents into a single portal. The fund providers updating one portal makes sense, rather than servicing multiple similar information requests”, says Thomas at AssetQ. Thomas goes on to say: “The fund buyers get access to a more complete set of information, become alerted to key changes and can evidence a complete and thorough due diligence process. Information needs to be accurate and kept up to date, the current processes are inefficient”.

Will the market adopt such a standard? Only if it meets their needs and improves operational and research efficiencies. John Goodall, head of private client research at WHIreland says: “Here at WHIreland, we recognise that technology will play an important role in managing investment suitability. We recently commenced use of a data repository to do the heavy lifting, as we look to improve efficiencies and have our resources focused on the areas where they add most value."

About the author

Eric Dickinson has more than 30 years’ experience working with wealth and asset managers in the UK and Europe. Most recently sales director at sigMacity Limited, Dickinson was formerly sales and marketing director at JHC Systems Limited, and prior to that UK head of sales and global relationship management at Société Générale Securities Services, where his personal focus was on the UK asset management industry. 

His most recent attention has been on suitability and collective investment funds due diligence, where he sees a need for an industry standard data repository holding all the necessary information to undertake thorough due diligence on any fund both quickly and cost effectively.