During the course of my work as a qualitative researcher covering the financial services sector, I am continually impressed by advisers’ ability to face widescale challenges, which can range from small niggles that become an accepted part of the territory to pretty severe headwinds that take a lot of grit, resilience and strategic thinking to overcome.

Published in partnership with Quilter Cheviot, our forthcoming guide for advice firms explores MPS due diligence and highlights that while some of the challenges and risks raised in this area are well known, others may come as a surprise. We often hear the phrase that people ‘don’t know what they don’t know’ and while there are many risks associated with MPS due diligence that advisers are navigating regularly and successfully, there are other risks that may be more subtle and therefore can fall off the advisers’ radar – or certainly down their list of priorities.

Well-known risks…

Time and resource pressure and the logistical challenge of implementing fund switches are two risks that are most commonly cited in our research for the guide.

The first one – the time and resource pressure associated with carrying out MPS research and due diligence – is a challenge that is felt particularly acutely by smaller firms with between one and five advisers.

Another widely-acknowledged challenge is regarding fund switches that take place within an underlying MPS, which can present a logistical challenge to implement. Given the amount of time and effort that go into effecting switches, we heard a clear desire to avoid them altogether, if possible.

Importantly, there are examples of risks that are less well known but well worth noting. These range from the unintended consequences of the Consumer Duty, to taking a retrospective approach to due diligence, to the unequal treatment of clients with more nuanced needs.

Let’s get into these in a bit more detail.

… the lesser-known risks

While there’s no doubt that the new requirements under the Consumer Duty should lead to a more upfront and honest adviser/client relationship that works in the best interests of the consumer, it is important to understand that there may be some unintended consequences.

The rules of the Duty – in particular those relating to costs – mean that in a bid to demonstrate value, advisers could become overly focused on some criteria at the expense of others. In prioritising more easily comparable features like fund charges and performance (and therefore perceived value), there is the potential to overlook other criteria such as an MPS’s suitability and robustness.

We heard from some corners that time pressures mean advisers might unintentionally adopt a ‘retrospective’ approach to their due diligence. This might be in whole or part, so gap-filling certain details or making decisions based on less formal criteria to then have it appear more structured in the written logs.

While most research and due diligence is concerned with assessing MPS cost and performance, it is important to consider the more operational aspects as well. These can make a world of difference when it comes to building and maintaining an effective ongoing relationship with your MPS provider.

For example:

– Has the investment manager got sufficient resources and infrastructure to manage its risk and service delivery in line with your needs as an advice firm?

o This is especially important if an MPS is running across multiple platforms

– Are there any potential bottlenecks where service falls over or delays occur if someone is off?

– Do they have clear and well-understood backup or contingency plans?

As one of our interviewees told us: “It’s never the financial resilience, never the fees, not really the performance [that trip up advice firms], because that’s quite often understood. It’s the operational side of it.”

A point we make in the report is that in having a clear and well-structured process in place from the outset means the whole due diligence process is less onerous and therefore mitigates the risk of having to fill in necessary details after the event.

While we understand that one solution is never going to be suitable for 100% of clients all of the time, it is important that when it comes to the approach and process being applied to arrive at the right solutions, that all clients are treated equally.

Familiarity bias?

Both types of risks can be tricky but it’s human nature to lean towards familiarity – even when it comes to problem solving. Don’t be caught unaware by certain risks arising out of MPS due diligence simply because they were less obvious than others.

Our guide will help financial advice firms get on a front foot with regard to their research and due diligence processes to help them save time, work more effectively and deliver better client outcomes. It’s not just a job for compliance – all relevant parties in the firm will have a role to play.

You can download a copy of the guide by following this [link] or for more information contact us at enquiries@nextwealth.co.uk.

Philip Leigh,  Senior Qualitative Researcher at NextWealth