Due diligence - ask for the 'how' as well as the 'what'.

In simple terms, the Duty is clear that advisers should be undertaking and documenting appropriate due diligence of their investments (including MPS) providers. If multiple solutions are used within a firm’s CIP, or by different advisers within a firm, it should be clear what the role and target market for each is.

Good providers will encourage and support this due diligence process, through openly sharing data and answering all questions as appropriate. Many, including HRIS, have extensive documentation, outlining policies, procedures, team structures and so on.

Advisers will be aware of the main pillars of standard due diligence which do not bear repetition here (from past performance, through to resourcing, due diligence on third party providers and suppliers, business continuity, team experience, strength of operational teams and so on).

However, if we were to pick up on any single aspect which doesn’t receive the attention it deserves it would be asking not just for the ‘what’ of current or historic portfolio asset allocation, but rather an
explanation as to ‘how’ it is arrived at. Asset allocation is the single largest driver of investment risk and return and yet it is relatively
common for MPS providers to ‘buy it in’ from third party vendors, with relatively limited awareness within the investment team of the underlying capital market assumptions involved and (in some instances) an incoherent link through to fund or security selection. Asking the MPS provider for clear documentation, demonstrating how asset allocation was arrived at, tested and refined (including stress and scenario testing as above) and then linked to fund implementation will help sort out the “wheat from the chaff”

Click here to read out full CIP checklist.