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Mifid II has exposed huge holes in wealth due diligence

When you reflect on your operational due diligence process for assessing funds, do you or your colleagues ever think – is our process robust? Do we ask all the right questions in the right way?

Mifid II has exposed huge holes in wealth due diligence

When you reflect on your operational due diligence process for assessing funds, 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 manner? 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 – do you think that on reflection, you failed to get an answer to the question you 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 on the operational side, whether on funds they wish to include in their buy-lists, or in revisiting funds that are already in use by their clients.

The process will involve both meeting the manager and issuing due diligence questionnaires or requests for proposal (RFPs).

Like-for-like difficulties

Firms may rely on the information that the fund manager provides as standard, rather than answering a specific set of standard operational 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 the client realising what is happening.

There is a growing realisation that complete and thorough operational due diligence is needed, partially driven by Mifid II and the regulator, but also by internal compliance teams who see data gaps, inconsistent data collection and ambiguous or inconsistent 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 them.

Furthermore, 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 in many ways. They are difficult to use when undertaking like-for-like comparison and general questions can be open to interpretation, inviting spin from the fund provider.

It is also time-consuming completing RFPs and resource intensive for fund providers, causing delays for clients in receiving the required information. Companies also need to ensure the information is kept up to date, but these updates are generally infrequent and may be undertaken every six months or every year.

Calls for clarity

A growing number of wealth managers are now calling for a centralised database of operational due diligence, which fund buyers could access, enabling them to just focus on carrying out investment due diligence.

AssetQ markets director Amery Thomas said this would benefit all fund buyers, streamlining the whole operational due diligence process, while also cutting costs.

‘There is an urgent need for a “golden-source” of comprehensive due diligence information available in a consistent standard format,’ he said.

‘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. 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.

Thomas says technology can do the heavy lifting, gathering all of the information and documents into a single portal. 

‘The fund providers updating one portal makes sense, rather than servicing multiple similar information requests,’ he said.

‘Fund buyers can also then become alerted to key changes, as well as being able to evidence they have carried out a complete and thorough operational due diligence process.’

Will the market adopt such a standard? Only if it meets their needs and improves operational and research efficiencies.

John Goodall (pictured above), head of private client research at WH Ireland notes that the use of technology will continue to play an ever more important role in ensuring suitability and his firm is embracing it.

‘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,’ he added.  

Eric Dickinson is an independent consultant

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