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Seven steps to DFM due diligence

30 October 2017

Andrew Denham-Davis of Brooks Macdonald recommends an end-to-end process for conducting DFM due diligence

Following my article in September assessing the importance of thorough DFM due diligence and the basis upon which it might be evaluated, I’m delighted to introduce you to the most recent edition of Brooks Macdonald’s annual ‘Suggested Seven-Step Approach to DFM Due Diligence.’

At Brooks Macdonald, our fundamental belief is that partnerships between professional advisers and discretionary fund managers (DFMs) provide the best possible outcome for clients. For this reason, we have built our business over the last decade and beyond by developing relationships with professional adviser firms.

While the approach suggested by our seven-step guide is not exhaustive, the feedback we have received over the years is that it advocates a ‘sensible’ approach and that the assistance with the data collection is invaluable. Indeed, we recently received feedback from former Technical Specialist at the FCA – Rory Percival – stating that he felt “the seven step process looks spot on” – praise indeed!

The suggested seven steps are:

1. Identify the relevant criteria for your clients’ and business’ needs

You must first identify which criteria are applicable to your client segment and how you intend, working in conjunction with a DFM, to service your clients. We suggest that there are four basic criteria that you should be assessing, all relatively easily assessed using independent research, as detailed below

Criteria Independent research
1. Range of services available Defaqto’s Matrix database
2. Performance Asset Risk Consultants’ Private Client Indices (PCI) report
3. Back office systems and controls Threesixty Assessment Report
4. Financial strength AKG DFM Profile & Financial Strength Report (long and short)

2. Recognise a long list of DFMs

Before you produce your shortlist, it is important to demonstrate that you have reviewed the wider DFM universe in your selection process. Our seven-step guide includes all the DFMs in Defaqto’s Matrix database and thereby ensures that your generated shortlist has considered all of these firms in the process.

3. Apply filters to create a shortlist

In this step, the whole process comes to life. The spreadsheet that supports our seven-step guide enables you to automatically arrive at a shortlist of firms based on the filters that you applied in step one. Not only does this create the list for you of perhaps half a dozen firms, it enables you to quantify the reasons why you have selected particular firms.

4. Analyse shortlist and issue detailed questionnaires

Once you have selected your shortlist, you will need to deep-dive to establish more specific detail about each firm. This is your opportunity to question them about all aspects of their operation to ensure you are happy / comfortable recommending their services to your clients. We suggest a good starting point is to review the reports mentioned in step 1 (ARC, threesixty and AKG) for each firm, where available. We would also recommend you then issue comprehensive due diligence questionnaires to each of the shortlisted firms.

5. Review questionnaire and meet relevant firms

In evaluating the answers, rank each firm according to its ability to meet your specific business and client needs. If you are happy with the answers, it will be prudent to meet the shortlisted firms and ascertain whether they will be a good cultural fit for you, your firm and most importantly your clients.

6. Keep an audit trail

The FCA’s thematic review into suitability in 2016 highlighted the importance of keeping detailed reports to demonstrate client suitability. It is essential to keep accurate up to date records of all materials relating to the servicing of client needs, to ensure that you can demonstrate the appropriateness of your selection

7. Monitor your panel and repeat process

A robust due diligence process will support ongoing monitoring of your DFM panel. Due diligence should be repeated at a time interval most suitable to you, or in the event that there is a change to your business proposition or indeed the practices of your selected DFMs.

We hope that our seven-step guide will help you to make DFM evaluation more efficient and compelling. If you would like to read our CPD-accredited guide and access our tool to generate a shortlist, please visit our website at: www.brooksmacdonald.com/uk-adviser/discretionary-fund-manager-due-diligence.

Professional Paraplanner