Choosing the right MPS partner is crucial for advisers. It allows them to continue to meet an evolving set of objectives and deliver good outcomes. Being clear on the due diligence processes will provide advisers with confidence in their partner selection. It will also help them assess the ongoing suitability of the partner’s service – it’s not a ‘one and done’ decision.

Our recently published guide for advisers, ‘Making sure your MPS partner is the right choice is designed to helps advisers with all aspects of these decisions. It also details the effects of a changing regulatory landscape on how advice firms select their investment propositions.

Why distinguish between research and due diligence?

Understanding how research and due diligence differ will help advisers ask more specific, nuanced, and relevant questions. Together, these can better frame how fit for purpose investment partnerships are in adding value to client outcomes.

Firms that fail to recognise the distinction face a number of risks. These might include: lower confidence in carrying out due diligence, less investment in a firm’s evolution in this area or more likelihood that clients will end up in the wrong solutions.

Advisers who ask better questions will better understand the suitability of the potential investment partner. And, ultimately, whether they will lead to improved client outcomes.

Understanding the shift from research to due diligence

Think of it as a phased process.

In phase one, the research phase, the firm decides on the core criteria an investment partner needs to deliver against. That might be around security credentials, the simplicity or complexity of its investment proposition, or how it evidences price and performance thresholds. Working through these criteria will determine potential partners’ credentials and whether they fit with the firm’s needs and approach.

Phase two, the due diligence element, is different. This step goes deeper in ‘stress-testing’ the performance and capability that the investment partners can deliver. This can be applied to shortlisted potential partners as well as ongoing, current investment partners.

One adviser I spoke to said due diligence was vital for giving their firm confidence in the investment partners they were shortlisting. They saw due diligence as the method that provided them with clarity over how firms would work together in high-risk scenarios, such as data breaches, and how in such scenarios, the policies and actions of one firm may affect the other.

Another adviser highlighted that even with a relatively simple proposition, distinguishing between research and due diligence was important.

“Our investment proposition is so vanilla you could put a flake in it and sell it at the seaside. Our advisory-based CIP is quite clear so research was having conversations with people that might operate that kind of service. But it was important that research refined the risks the firm is willing to accept. It blurs with due diligence because you’re trying to refine ‘what don’t we want?’ You need to have some elasticity around the starting picture but also having some clarity on what sort of partnership are you looking for and the risks that you’re taking on.”

Not just a today problem: the importance of ongoing due diligence

In focusing on assessing new partnerships, do advisers risk deprioritising how they review current relationships? Conducting regular due diligence on existing partnerships has taken on specific merit in light of the Consumer Duty, primarily to make sure investment partners can deliver in line with shifting client circumstances. This is important when considering the needs of long-term, as well as varied, client banks. But this assessment requires advice firms to be equally dynamic in their appraisal of partners, so that any changes in the partner’s proposition, or firm structure, can also be accounted for.

“As MPS providers grow, the more operational expertise they will need. As advice firms, we need to get better at asking ‘have MPS providers mapped how they will handle clients’ money as their firm grows? What does that roadmap look like and how will that dovetail with how we work together? What does that roadmap look like and how will that dovetail with how we work together?”

Due diligence is largely about asking the right questions. It is about challenging the provider and holding them accountable while at the same time helping you feel confident in your choice of partner. Effective due diligence should also make it easy for you to explain your decisions.

The guide, which includes a comprehensive, step-by-step process to help you choose the right partners, can be downloaded here.

We welcome any feedback and ideas for future research on this or any other topic that could help your business thrive. Get in touch with us at enquiries@nextwealth.co.uk

Philip Leigh,  Senior Qualitative Researcher at NextWealth