Next level Platform Due Diligence: PROD and 'meaty' questions

The information contained in this page is for professional Financial Adviser use only.

Much of the financial services industry is still getting to grips with the PROD governance rules. This slower than expected uptake is partly because some of the necessary steps that advisers are required to take – namely client segmentation – are not explicitly stated under the rules.

However, thankfully, some of the other PROD rules are far more forthcoming, including what advisers (known as ‘distributors’ under PROD) need to consider when it comes to their due diligence process for ‘manufacturers’, which includes platforms.

The specifics

PROD rule 3.3.2 – to be exact – highlights three key areas for advisers to focus on when it comes to platform due diligence:

• the impact of charges
• the financial strength of the ‘manufacturer’
• how efficiently and reliably the platform deals with you or your client at the point of sale

The good news is that most advisers are already likely to include these three points as part of their established platform due diligence process. In addition, most advisers will also assess the following areas as part of a typical due diligence exercise:

• terms and conditions of using the platform
• range of funds, tax wrappers and other products available
• range of asset classes
• functionality
• accessibility
• additional tools (e.g. risk profiling and asset allocation tools) and
• support services

The FCA recognises that firms may decide to offer the services of a limited number of platforms, so before looking at the platforms themselves, adviser firms will also want to consider:

• your overall business model and the type of services you want to offer – which might differ depending on the type of client
• your typical target market and approach to client segmentation
• your remuneration model and
•  your existing systems and procedures

If any of this is starting to sound a little too obvious, then bear with us just a moment, because we’re now going to look at the meatier parts of platform due diligence which ask deeper and lesser known, but no less important, questions and tips that advisers should watch out for:

1. Does a platform’s range really compliment your proposition?

It’s true that the breadth of a platform’s universe is very important, as this is what will ultimately enable, rather than restrict, an adviser’s proposition. But it’s arguably not enough to simply ask if a platform offers ETFs, for example. How assets such as ETFs are traded can have just as big an impact for client outcomes. Put simply, it’s all about asking how as well as what.

When it comes to a platform’s proposition, flexibility is also key. What you’re looking for here is a broad enough asset base and wrapper range to deal with the diversity of a client’s needs, not only now but if and when their circumstances change.

2. Will your platform allow for the evolution of your business?

Whether it’s in response to new regulation or a push into new markets, an adviser business can evolve greatly over time. Understanding if your platform has the asset scope and functionality to be able to grow and adapt with you is therefore key, even if there are no immediate development plans on the horizon.

3. Can you spot any conflicts of interest?

You should feel completely confident that the platform will not attempt to build a relationship with your end clients. Good questions to help gauge this include asking if and when the platform may contact a client directly or if they offer services such as branding, which should ensure that investors don’t get confused about the platform relationship.

4. Commitment to the market

The many different provider business models out there can make it challenging to fully assess financial strength but we would argue that looking purely at profit and loss in isolation, as a measure of commitment to market, is too simple. Using an unbiased, third party agency like AKG can help you to review more than just the financial strength.  They look at financial strength as well as future performance and operational strength. You can see their latest report here.

5. People and cultural fit

Ultimately, a document-based due diligence exercise can only tell you so much. Putting in some important face-to-face time with representatives from platforms is crucial to get a real feel as to how they operate in practice.

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