Due diligence became common practice in the United States financial world with the passing of the Securities Act of 1933. Under the act, securities
Due diligence became common practice in the United States financial world with the passing of the Securities Act of 1933. Under the act, securities dealers and brokers were now fully responsible for disclosing information about the products they were selling before entering into a proposed transaction with another party.
Financial due diligence has come a long way since 1933 and today, regulatory oversight has increased tenfold which means increased liability, accountability and resource requirements for financial professionals. As a result, the industry is finding new methods to respond and keep up with the changes. For example, there has been a shift in focus on operational due diligence and brokers are now spending more time getting products approved. Meanwhile, advisors are examining closely their broker/dealers’ due diligence process.
Many in the financial space agree, a due diligence program can never be too thorough. Wealth management advisors understand the importance of researching the products and firms they recommend their clients invest with. Afterall, trust and confidence is a key factor when it comes to developing a successful client/advisor relationship. While the internet is a good place to start, due diligence must go much further than online.
Kenneth Springer, president of Corporate Resolutions Inc. explains, “The Internet is a great tool but it has limitations because it often shows the accolades but not the bad stuff, so you have to dig deeper. Initial steps should include checking out social media mentions, probing regulatory actions and verifying the educational and other credentials offered.”
Thomas Kane, Chicago private wealth manager, says he spends a significant amount of time researching products and doing his due diligence for the benefit of his clients.
“We go out of our way to get that level of transparency or we simply don’t invest,” says Tom Kane.
Thomas Kane goes on to say, “In order for an investor to make a well-informed decision when they are giving someone else investment decision making advice, they typically have a standard set of questions and information that they need to review before they are willing to move forward. Then they can start to dig deeper.”
When he’s considering whether to recommend a particular fund, Robert Henderson, president of Lansdowne Wealth Management, will research information about a money manager’s previous history and track record.
“It’s important when looking at funds to examine the holdings and evaluate whether it’s appropriate that the fund be compared to the benchmarks they are being held up against,” he says.
Alternative investments such as private placements have come under further scrutiny, so much so that some firms are shying away from the investments altogether. At the same time, investors are inquiring about adding more alternatives to their portfolios, making due diligence an imperative step.
Financial industry professionals conduct their due diligence in different ways; however, one factor remains constant, and that is everyone is being much more detailed, realizing there is little room for error.
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