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Good Practice Guide - Personal Finance Society PDF

17 Pages·2015·0.14 MB·English
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Good Practice In association with Guide FEBRUARY 2015 Adviser research & due diligence on discretionary investment managers In responding to members’ requests, the PFS has commissioned this Good Practice Guide to help Adviser Firms develop their approach to due diligence (DD) on Discretionary Investment Managers (DIM’s) and the service they provide. The aim of this Guide is to assist member frms of all sizes address a challenging topic in an effcient and client-centric manner. Foreword 2 Section 1 – Introduction 3 Section 2 – The Issues 5 Section 3 – The Good Practice Guide 8 This Good Practice Guide is the frst in a planned series of guides that are being developed for members in collaboration with experts in their feld and the Financial Conduct Authority. Good Practice Guide Foreword For many advisory frms the run up to RDR involved a signifcant amount of soul searching and it was a catalyst for many to question, and focus, on the core components of their value proposition. One conclusion for many frms was that investment management was not an area where they had the necessary skills, experience or capacity in-house. Discretionary Investment Management (DIM) became a buzz word and a plethora of new DIM frms entered the market to court advisers, seeking to entrust considerable sums of their clients wealth. However, for many advisory frms choosing a DIM partner was a steep Keith Richards learning curve. In the absence of a well-established due diligence model, Chief Executive, the Personal some frms struggled to add the layer of additional cost that represented Finance Society the best value for money for their clients. There was also a lack of clarity over contractual relationships in terms of what outsourcing actually means and the resultant obligations on the adviser frm. Research and due diligence, especially in relation to DIM, is a key area of attention for the Regulator. As with any business partnership a careful audit trail documenting the research and due diligence steps taken is essential. But don’t forget that an element of due diligence often boils down to intangibles such as culture and trust. You need to establish whether the approach of the discretionary manager is compatible with your own beliefs – is there a philosophical ft and could you realistically work with the people on a regular basis? Don’t forget that both the adviser and any DIM both have suitability obligations to the same client, so it is essential there is documented clarity over who will be responsible for what. Working with a DIM does not mean the outsourcing of responsibility or advice liability. This guide is focused on helping members understand good practice when conducting research and due diligence on discretionary investment managers, which I hope you will fnd of value. Don’t forget that the process is equally applicable to regular reviews. Good Practice Guide eS ctio n 1 – tn I roduction In responding to members’ requests, the PFS has commissioned this Good Practice Guide to help Adviser Firms develop their approach to due diligence (DD) on Discretionary Investment Managers (DIM’s) and the service they provide. When developing and offering services to their clients, it is expected that the same professional standards are applied by all Adviser Firms, irrespective of size and resource. The aim of this Guide is to assist member frms of all sizes address a challenging topic in an effcient and client- centric manner. A great deal of confusion exists as to the allocation of responsibility between the adviser and DIM when jointly providing a service to the same client. In part, this may be due to DIMs being brought into the RDR towards the very end of the consultation phase leading to inconsistencies of approach. However, there was confusion way before this and Adviser Firms may have a legacy book of business that has been subject to minimal research and DD on the DIM provider. As long as clients continue to receive these services, Adviser Firms should ensure they fully understand the basis of the relationship and their resultant obligations. This guide works with the ‘spirit ‘of RDR and the general guidance provided by the regulator but it is the application of members’ professionalism, experience and knowledge of their client requirements that will allow them to develop their own DD process. At a conference in London, Robert Taylor, Head of Wealth Management & Private Banking Team at the FCA introduced his speech with the following: s e u s s i e s e h t g n i k a t e b o t t u b , s i * t c u d n o c t a h w d n a t s r e d n u o t t s u j t o n e r e h e r a e W “ e r a u o y t a h t y a s d n a r a t e h r u o y n o s d n a h r u o y t u p y l l a u t c a n a c u o y t a h t o s d r a o b n o g n i o g r e v e n s i y e n r u o j t a h t d n a , e l b i s s o p d r a d n a t s t s e h g i h e h t o t g n r i y e h t v e g n i o d e w o d t a h W . t u o b a g n i k n i h t e b o t e v a h s y a w l a e w g n i h t e m o s s i y e n r u o j t a h T . d n e o t ” ? n o e v o r p m i o t d e e n r t y s u d n i n a s a e w o d t a h W ? r t e e t b o d o t d e e n eGriB k s i R t c u d n o . C ( ) 4 1 0 2 r e b m e v o N – g n . s s e n i s u b r u o y f o r a e h t e h t t a n t s e i l c r u o y u t g p n i t . e . i * Good Practice Guide/February 2015 3 Good Practice Guide -FF� 1a0d2P� eP�aacPP- 0iauF P/oe/Pd P5b11P� eca0/FcPe2cPd0� 1F�F2/FcP�d/od2Pa� biP�b d2F P0ieu/duF P Pd PF F2/de1Pe Pd/Pua2/id�b/F P buoPeP d�2dyue2/PF1F�F2/P/aP0ia0FiPuŠ a2cbu/P• e2cPF2 bid2P� 0a d/dF� P u1dF2/Pab/ua�F � “Over the coming months and into next year, the subject of due diligence will continue to be on the agenda and my hope is the industry generally and participants within the industry will continue to talk about what good due diligence looks like and to move everybody forward in that respect”. (Rory Percival FCA Technical Specialist, October 2013) yhW D i s os iopm rtatn ? 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(FSA July 2012, FG; Assessing Suitability: Replacement Business and Central Investment Process, para 2.3, p4). “Both the DIM and adviser have suitability obligations to the same client... But it needs to be clear who is doing what”. 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/aPe2PF2cPu1dF2/P� P� tid2ud01F Pe001P� /aPe11Peb/oaid FcPyi � Pb� /P/oFPiFb� 1e/ai • P rbdcFP1aa ‰ P0ide� id1P� e/‘ Principle 2PP� yiP� b� /Pua2cbu/Pd/ Pb� d2F Pd� /oPcbFP d‰ 11P• ueiFPe2cPcd1dF� 2uF Principle 3PP� yPiP� b� /P/eF‰ PiFe a2e1� FPueiFP/aPaie� 2d FPe2cPua2/ia1Pd/ Pe55edi PiF 0a2 d1� P� e2cP F55Fu/dF� 1P•� d� /oPecFb• e/FPid P‰ e� 2eF� F� 2/P � /F � Principle 6PP� yiP� b� /P0eP� cbFPiFe� icP/aP/oFPd2/FiF / Pa5Pd/ Pub /aF� i Pe2cP/iFe/P/oFP� 5edi1� Principle 7PP� yPiP� b� /P0eP� cbFPiFe� icP/aP/oFPd25aie� /da2P2FFc Pa5Pd/ Pu1dF2/ P• e2cPuab� 2due/FP d25aie� /da2P/aP/oFP� d2PePe� P� o� duoPd Pu1FeiP• 5ediPe2cP2a/Pd� 1Fecd2� GoFPcF d2� Pe2cPcF1dF� iP� a5P/oFP Fid� uFP/oFP� a55FiP/aPu1dF2/ Pd P/oFPiF 0a2 dd� 1d/P� a5P/oFPecd� FiP� 2• d� /d2P� ePP‚•- /aPe d /Pd2PcF1dF� id2P� /oFP Fid� uFPue2PF� PeP F2 d1� FPe00iaeuoPd5Pe2Pecd� FiPd P1aad‰ 2P� /aPF2oe2uFP /oFdiPd2F� /F� 2/Pa55Fid2P� aˆ F� F� iP• d/Pd P/oFPecd� FiPo� aPb� /PF� Pu1FeiPe/Pab/ F/Pa2Po� e/P/oFP� eiFP 1aad‰ 2P� 5aiPe2cP/oFPa0Fie/da2e1P5ieF� a� iP‰ b0a2Po� duoP/oFP Fid� uFPd P0iad� cFcP� God Pd� 11P1FecP/aPePa� iFP /ibu/biFcPe00iaeuoP/aPe� iF‰ /PiF FeiuoPe2cP/oFPiF b1/d2P� P- 0iauF P� Good Practice Guide/February 2015 8 Good Practice Guide 2• P/od PraacPtieu/duFPrbdcFP• F� PcFy2FPb- FPd- 1dF� 2uFPP€- e P‘ T’ he care a reasonable and prudent person (Adviser Firm) should take before entering into an agreement or a transaction with another party (the DIM). Gathering detailed, quality information over and above general marketing documentation is a fundamental part of the research process, in order to identify anything deemed material in the service or relationship. By using the same DD process systematically, advisers will be equipped to make an informed decision ensuring all the costs, benefts, known and potential risks are analysed and assessed against the Adviser Firm’s pre-defned criteria. This will lead to greater confdence in client outcomes meeting the identifed client needs.”P2• P/od P0iauF P• /oFPecd� FiPue2PP£ /aP/oFPF/� F2/PiFe a2e1� FPP£ iF1P� a2P 5eu/ P0iad� cFcPP� eP/odicP0ei/P� yiP� b� /Pd� 11P2FFcP/aP/F /Pa0d2da2 ¦� GoFPcFy2d/da2P /ei/ Pd� /oP/oFP0iFd� FP/oe/Pa� bPeiFP1aad‰ 2P� /aPF2/FiPd2/aPe2Pei� FFF� 2/PaiP/ie2 eu/da2P d� /oPePP�‚•- GoFiF5aiFP• /oFPyi /Pb• F /da2Poe P/aPF� PP£ oƒ ¤� 5• Pa� bPe� 2/Pe 2cPeiFPe1� FP€ /aP0iad� cFPe2Pd2o… ab FPd2F� /F� 2/P a1b/da2P/aP/oFPiFb• diFcP /e2ceicPa5Pa� biP u1dF2/ P• F0� Fu/e/da2 P• a� bPeiFPb21dF‰ 1P� /aPF� P1aad‰ 2P� /aPd2d� /FPePP‚•- /aPoF10Pa� bP� F‡ ua2� d d2P� /oFP2FFcP bF� / Pa� bPue2PdcF2/d5P� eiFe Pd� /od2Pa� biPu1dF2/Pd2F� /F� 2/P0ia0a d/da2P/oe/P d� o� /PF� PF2oe2uFcPd5Pa� bPF� iFP/aPd2d� /FPePP‚•- /aPoF10Pe2cPF� e2 Pa� bPeiFPe1iFecP� a2P/oFPiaecP/aPuiFe/d2P� e2PF55Fu/dF� PP- 0iauF P� 5¡ Puabi FP• /oFiFPeiFPa/oFiPd2F� /F� 2/P a1b/da2 P/oe/P2FFcP/aPF� Pua2 dcFiFcPe/P /od P /eF� Pa5P/oFPFF� iud FP• buoPe P/oFPie2F� Pa5P0iacbu/e�… FcP a1b/da2 P� God P0e0FiP2aP� e bF� P/oe/P• e PePiF b1/Pa5P/od Pd2d/de1Pua2 dcFie/da2P• /oFPc� d� FiPd� iP� oe PcFudcFcP/aPua2 dcFiPePe�…‚•- FcP a1b/da2� 1a. Know your client’s and your own requirements /• Pd Pe00iFude/FcP/oe/Pe� 2P� u1dF2/ P• d5P2a/Pe11P• uaF� P/aPa� bP5aiPecd� uFPF� ueb FP/oFP� eiFP2a/Pu1FeiPd2Po� e/P /oFdiPiFb• diFF� 2/ PeiFP� aˆ F� F� iP• 2‰ a1� FcF� Pa5Pa� biPFd� /d2P� u1dF2/ Pe2cPa� biPe00iaeuoP/aPy2e2ude1P 01e22d2P� d� 11Pe11aP� a� bP/aPei/dub1e/FPuid/FideP/oe/Pd� 11Pb� dcFPa� bPd2PF� F/d2P� a� biPu1dF2/ • PiFb• diFF� 2/ P� a– biPu1dF2/P FF� 2/e/da2PFF� iud FPe� P� F� 11Pe11aP� a� bP/aPdcF2/d5P� i� ab0d2 � Pa5Pu1dF2/ Pd� /oP 0FudyuP d2F� /F� 2/P2FFc � e�• 0� 1F Pd� o� /Pd2u1bcFPP£ ePodo� 1P� 0Fi a2e1Pd2F� /F� 2/P Fid� uFP• ua2ycF2uFPd2PePF� 112‰… a2� Py2e2ude1P d2 /d/b/da2P• cFa� 2 /ie1� FPe� 1bFP• aiPeuuF P/aP 0Fude1d /Pd2F� /F� 2/PeiFe � e�• 0� 1F Pa5PeiFe Pa� biPyiP� d� o� /Pua2 dcFiPo� F2Pe d‰ 2P� “What am I looking to achieve by working with a DIM?”Pe� P� d2u1bcFPP£ e11Pd2F� /F� 2/Pid P‰ e aude/FcPd� /oPib22d2P� 0ai/5a1da P/aP d/Pd� /oP/oFPP•‚•- ua2 d /F2uP� a5P2e/da2e1P Fid� uFPeuia Pe11Pa� biPa5yuF P• eP /ia2P� iF1e/da2 od0Pd� /oP F2daiP0Fi a22F1Pe/P/oFP P‚•- e2cP aPa2� 1b. Understand your frm’s investment capabilities and resources P� a� i/oo� d1FPFF� iud FPd Pe2Pe00ied e1Pa5Pa� biPyi •� Pd2F� /F� 2/P /iF2/� o Pe2cPF� e2‰ F F P� God Pd P d0� ai/e2/Pe Pd/PoF10 PF /e1� d oP/oFP1FF� 1Pa5Pua0� F/F2uP� e2cPiF abiuFPee� d1e1� FP/aPib2P/oFPa2a� d2P� � /F � Pe2cPua2/ia1 PiFb• diFcPo� F2Pa� id‰ 2P� d� /oPePP‚•- d 2Pu“ Pd dP€ F� 1aP� F� P1aaP‰ e/Pcd55FiF2/P 5ieF� a� i ‰ Pee� d1e1� FP�€ GoFPi� Fe/FiPa� biPyi •� Pd2a� 1F� F� 2/Pa2PF� oe15Pa5P/oFPu1dF2/P• /oFPa� iFP iF 0a2 dd� 1d/P� /e � Pd� /oPa� biPyiP� e2cP/oFPi� Fe/FiP/oFP2FFcP5aiP 0FudyuP d‰ 11 Pe2cPF0� FidF2uFP� 1� /Fi2e/dF� 1P•� /oFPa� iFPiF 0a2 dd� 1d/P� 01euFcPb0a2P/oFPP‚•- /oFPa� iFP /iedo� /5aie� icP/oFPa2a� d2P� a� 2d/aid2P� ue2PF� uaF� � P•Ž¡�¦ P¥�š�™ P€™ P� yiP� d� 11PF� P/eF‰ 2P/aPF� Pd2Pua0� 1de2uFPd� /oPe2P� ib1FPd2P/od P abiuFa� aP‰ /oe/PiFb• diF Pd/P/aPa/� ed2Pd25aie� /da2P/aP/oFP F/� F2/Pd/Pue2P oaP� d/Pe� PiFe a2e1� FP5aiPd/P/aPiF1P� a2Pd25aie� /da2P0iad� cFcP/aPd/Pd2Pi� d/d2P� P� e2a/oFiP0Fi a2� P•Ž¡� P«�š�™ P€“ 2• PiF1d� 2P� a2PP•Ž¡� P¥�š�™ P•‡ ePyiP� oab1cP/eF‰ PiFe a2e1� FP /F0 P/aPF /e1� d oP/oe/P/oFPa/oFiP0Fi a2P0iad� cd2P� i� d//F2P d25aie� /da2Pd P2a/Pua22Fu/FcPd� /oP/oFPyiP� e2cPd Pua0� F/F2/P/aP0iad� cFP/oFPd25aie� /da2� Good Practice Guide/February 2015 9 Good Practice Guide c… r† 0‰ eoiu t0er Port� idto�• urd0r PorFbyrytio• r These can now be considered to help identify the most appropriate solution; dr- P‹ oru o�• r1r� 1‡ id• 0r� iot� d10uPdr� 1• r� o� or� dur1• u rti� 1i� dt oro• o‡ o0r1• i� riŠ r• t0er1• i� rcP1uo0r Fbyu r- d0r1ieoir 1reod� o� ir Poruoid� cor 1r1• i� rcd� o0 u - • The relationship and service is an integral part of your overall client service offering with the DIM personnel attending client meetings, both initial and ongoing reviews. The client will see this as a partnership, with the DIM offering a specialist investment service. Or • The DIM is simply a provider of an investment solution with support to be called upon as and when required. Additionally, do you have any other specifc requirements you may have when working with your chosen DIM(s)? ddr- P‹ oro�Œ it d0r� 5ito• 1‡ ir†• P‹ durdurcid dctr� turd rd‡ r� edc t or Poriou � t0 r1d�• t� d10urt0er iou1� 0udd• d� dour1r� 1• Prt� i dou By identifying and agreeing your frm’s and the chosen DIM(s) respective suitability obligations on a ‘suitability matrix’ (see overleaf) arrangements and terms of business can be put in place to ensure there is no ‘suitability gap’. In the market, there are variations on each of the models outlined below. Which one is right for your frm will depend upon a number of factors including your identifed requirements and the strength and ability of your in-house team to provide the necessary systems and controls required. If you agree the DIM can rely upon your frm for the provision of client information, do not be surprised if the DIM wishes to conduct a DD service on your frm. This is good business practice. Good Practice Guide/February 2015 01

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