James Downie and Clare Downie, Founders of Due Diligence SA™
The vast majority of salary earners use the services of a financial advisor to help them navigate the complexities of life cover, permanent health insurance and saving for retirement. Buying insurance cover – or as it is often referred to, being sold insurance cover – is comparatively easy. One can establish how much cover one needs, often with a tool used by one’s advisor, ask for quotes and then buy the most appropriate product for one’s requirements.
Saving for retirement is far more complex. Investment time horizons, risk-aversion, products from crypto-currency to cash are all made even more complex by trying to figure out which asset manager will be amongst the best in a future which is unknown. The hackneyed phrase that past performance does not forecast future performance has been proved repeatedly. So, how does the advisor assess the possibility of Asset Manager A being better than Asset Manager B in the future?
Many advisors will attend a few conferences, watch the press for good and bad reports and present the client with last month’s fact sheet as proof of that research.
However, and it is a big HOWEVER, a proper investigation into an asset manager whose products may or may not be used for client portfolios should start off with as thorough a due diligence of the asset manager as possible. And this process nearly always starts with a Due Diligence Questionnaire (DDQ). Many DFMs, multi-managers, asset consultants and wealth advisors send out, usually annually, DDQs to asset managers asking for information on company governance, people employed, process and philosophy, sustainability, empowerment credentials, risk management etc.
A thorough analysis of that DDQ, probably followed by a, sometimes intense, manager visit or meeting to gain a more thorough understanding of some of the points raised by the DDQ, is critical to the success of an organisation or advisor compiling portfolios in which clients will be invited to invest.
If Due Diligence is not conducted in a detailed and studied way, the advisor runs huge risks of being challenged about why a certain asset manager, product or strategy was recommended. South African law has several cases, FSCA fines and sanctions where advice was deemed to be weak, misguided or non-existent. And, of course, the client may invest in under-researched products which may not produce the required performance.
Clients seeking advice from professional firms should demand to see proof of the processes employed by the advisor, DFM or multi-manager to gain some peace-of-mind that there is some rigour behind the advice.
All too often, products from asset managers with the most popular names are recommended on the grounds that the advisor doesn’t need to research well-established firms. SA investment history is a road littered with the wrecks of what used to be established names that went out of business or were absorbed into other firms where they lost their unique character.
Advisors should step up and streamline their DDQ process so that it does not require huge resources but still covers the bases in the case of a challenge. This process is publicly available for free to accredited DFMs, multi-managers and advisors so there is a) no excuse for not doing the research and b) no reason to employ internal resources for due diligence.
ENDS
