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How to get a complete funds due diligence process

The Wealthnet, 15/03/2019

Fund providers’ tender teams are, more than ever before, being overburdened with requests for information and requests for proposal (RFPs). This highlights the ever-increasing need for accessible due diligence information, and for a central repository to hold fund data, enabling instant assessments on the fund and the company providing the fund.

In a recent article, the benefits of an industry standard “golden-source” data repository were discussed. These benefits include having a repository answering the questions generally raised in a due diligence process, a database enabling ease of comparison of different funds, technology doing the ‘heavy lifting’, and documented date and time stamped audit evidencing that fund buyers have undertaken full due diligence.

The above benefits lead to a more efficient industry, reducing costs for both fund buyers and fund providers and ultimately reducing costs for the investor.

The regulator’s desire to see better levels of understanding and hence transparency on opaque investment products is a further reminder of the need for accessible information that can be used as part of a full and thorough due diligence process.  An industry standard repository helps the market meet this need in a cost effective and efficient way.

A technology-based repository can further improve on a process, where historically the issuing of bespoke RFP documents has been the modus operandi, by offering a hub of due diligence information that can provide consistent due diligence data on funds across providers.

Historically, due diligence has meant trawling through the small print of a lengthy prospectus, reviewing multi-page standard documentation from the fund providers, often leading to more questions than answers. A lot of time is needed on one fund to fully understand how it operates and the risks it can take to achieve its performance. Having a better level of understanding also helps prepare for fund manager meetings.

The due diligence data set includes both static data, that changes very rarely, and volatile data, often key data that affects risk and which changes on a frequent or regular basis. Therefore, the need exists for volatile data alerts,  whereby the fund provider keeps the fund buyer updated on the risk pertaining to volatile data as it changes.

Chloe Platts, senior paraplanner at Kirk Rice LLP said her firm recently implemented a data repository.

“At the touch of a button we can now access all the key and up to date information on a huge range of funds. This includes information not available from other sources, and it enables our discussions with the fund providers to be well informed and targeted, meaning that we can unambiguously have any concerns quickly addressed,” she said.

Automated alerts may be configured by the fund buyer to notify them of key fund information changes thereby avoiding missed updates from the fund provider that may prove critical, as well as being informed of important changes affecting fund risk and that are not provided as matter of course by the fund provider.

“Immediacy of change notification, particularly on important risk-based data often hidden under the covers, is vital for ongoing due diligence.  The alerts facility is a market first and a vital and efficient way of communication between the fund provider and fund buyer”, says Amery Thomas of funds rating service AssetQ.

It is clear that the industry needs to use a standard repository of fund due diligence data, to ensure that properly evidenced and complete due diligence can be cost effectively and efficiently undertaken.