The BIG RISK that could put EB Advisors out of business
23 Sep, 2022

The BIG RISK that could put EB Advisors out of business

James Downie, Director of Due Diligence SA (Pty) Ltd

There is a huge risky elephant in the room that South African EB advisors know needs feeding but may either be too busy to do the job thoroughly or think they have delegated it somehow to another entity!

EB advisors choosing funds for clients or limiting the selection in any way should be able to demonstrate a comprehensive knowledge of the universe of asset managers doing business in South Africa and their portfolios. But how much do they really know about those portfolios and the people and companies managing them? Have they built a comprehensive due diligence library, at least of the managers they favour, if not of the whole industry?

EB advisors should go to the trouble and expense of demonstrating they have researched their proposed asset managers thoroughly because it exemplifies their standards of stewardship over the members’ retirement capital. Simply picking from a platform menu or umbrella choice will not be sufficient.

The Durr vs ABSA case is a must-read for any EB advisor as it drew the line where the level of knowledge should be when consulting on investments. The first question to ask is, “What level of skill and knowledge should be demonstrated?” If the EB advisor holds itself out to be able to compare one asset manager with another and suggest combinations of managers to meet set benchmarks or targets, it should possess and exhibit skill and knowledge according to the standard of expert it purports to possess that is expected, according to Durr vs ABSA.

The second question is, “What is the standard for judging the expert?” The Durr case concluded that an “expert” offering a specialist service is held to a higher standard.

Durr came before FAIS which codified many of the requirements of advisors. The FAIS Act, in the General Code of Conduct, demands that EB advisors “must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.” [emphasis added].

Typically, the EB advisor may begin the research process with a Due Diligence Questionnaire (DDQ) which is sent to the asset manager. This can be a substantial document, tens of pages long, often proprietary to the EB advisor, but every one of them asks the same questions and the asset manager dreads receiving the requests. EB advisors devote people and time to requesting and supplying what is essentially the same thing. Asset managers have to allocate valuable unproductive resources to answer over 50 questionnaires a year, including those from the retail advisors. According to the asset managers, it is extremely rare that any DDQ asks a question that has not been asked hundreds of times before.

James Downie, of Due Diligence SA, states, “As an EB advisor, asset consultant and DFM, I have sent dozens of DDQs to asset managers over the years, knowing full well that I was requesting them to duplicate work they may have done for someone else the day before but, because my DDQ was slightly different, it required bottom-up work from the asset manager, admittedly with quite a bit of cutting and pasting.”

Smaller EB advisors tend to rely on the LISP or the umbrella trustees having done the due diligence for them but this is simply not the case.

In fact, only an incisive analysis of the managers’ portfolios using skill acquired over years and specialised quantitative techniques can result in portfolios with the “special sauce” of the EB advisor, including diversification, style combinations, geographical and sector spreads etc.

EB advisors should be treating the DDQ as a commodity and using the time spent on sending it out to dozens of asset managers and filing the completed questionnaires to applying their competitive advantage.

Clare Downie, a director of Due Diligence SA, says, “We have researched a huge number of DDQs from SA and abroad and we have compiled the ultimate DDQ for all fund selectors. It’s not just the basic questions that reveal the manager’s DNA. Using my background in Psychology and Behavioural Finance, we have introduced questions that have genuinely never been asked before which make the asset manager think outside of the box and reveal their individuality.”

James Downie goes on, “The EB advisor should be treating the DDQ as a commodity and using the valuable time to demonstrate their competitive abilities to analyse the qualitative data in them and conduct cutting-edge quantitative and qualitative techniques to achieve the diversified and uncorrelated results.”

There’s no question that the DDQ is vitally important and the fund selector must use it.

James Downie concludes, “Frankly, it is quite surprising that FSCA does not demand to see proof of a comprehensive due diligence library when conducting a review of a fund selector.”


James Downie is a director of Due Diligence SA (Pty) Ltd, a company established to provide due diligence materials and questionnaires to advisors, discretionary fund managers, multi-managers and consultants who would rather work smarter than harder.

He has over 35 years’ experience of investment management, research, and consulting in both the institutional and individual markets.

Clare Downie is a director of Due Diligence SA (Pty) Ltd and has an Honours degree in Psychology. Her experience on the behavioural side of finance and decision making has added a different flavour to the information gathering process from managers.

t: +27 21 794 7748




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