Many investment advisers choose to engage third-party service providers to perform a number of important services for their firm and their advisory clients. There are third-party service providers offering a number of important services to investment advisers. Some of the services include client and portfolio management software systems, marketing of advisory services, referring clients to the investment adviser, calculating investment valuations, proxy voting, financial reporting, and maintaining required books and records. However, when a service provider is utilized, the investment adviser still retains its fiduciary responsibilities for the delegated services. As a result, investment advisers should develop strong compliance policies and procedures for performing due diligence when selecting and retaining third-party service providers.
While most investment advisers understand the due diligence process as it relates to recommending investments, many investment advisers neglect or cut corners when performing the due diligence process of third-party service providers. Establishing these relationships that will ultimately affect a client requires an investment adviser to have a system in place to conduct reviews to determine that the relationships are in the best interest of the clients and are in compliance with investment adviser regulations. In fact, regulators have issued deficiencies to investment advisers that have failed to establish adequate due diligence policies and procedures even when no harm has been done to a client.
Investment advisers need to have in place a system to conduct a due diligence review of any third-party hired to work on behalf of or provide services on behalf of the investment adviser or to provide services to clients based on the recommendations of the investment adviser. In order to implement and enforce a due diligence process, investment advisers should develop written policies and procedures outlining their due diligence process. An investment adviser’s due diligence policies and procedures should be designed to ensure that each third-party is properly investigated before an agreement is signed and the third-party does work on behalf of the investment adviser. The policies and procedures developed relating to the due diligence process should include documenting and retaining records related to the due diligence review. Documentation should include the information gathered during the review process and well as the findings and results of the review. It is important to develop a strong paper trail regarding the due diligence process so that when faced with a regulatory exam or investigation the investment adviser can demonstrate that a reasonable investigation was conducted prior to establishing a relationship with any third-party.
It is also important to keep in mind that the due diligence review process is not a one-time process completed only at the time the initial relationship is established. Ongoing due diligence is crucial and its absence creates a critical weakness in an investment adviser’s compliance program. Depending on the type of relationship and the services being provided by the third-party, quarterly or annual reviews should be conducted to examine any possible material changes that may be made to the third-party’s business practices and to re-evaluate factors analyzed during the initial due diligence review of the third-party.
If you would like more information regarding an investment adviser’s fiduciary duty to perform due diligence on third-party service providers, RIA Compliance Consultants is hosting a webinar, “Conducting Service Provider Compliance Due Diligence,” on July 12, 2012, at 12:00pm CDT. During this webinar, our consultants will provide advice on what items should be covered during an investment adviser’s initial due diligence review and as well as what should be included in follow-up reviews. Click here to register for this webinar.
RIA Compliance Consultants can help your investment adviser develop policies and procedures to implement a third-party service provide due diligence process. If you would like to discuss how RIA Compliance Consultants can assist you, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our consultants if you have not previously worked with RIA Compliance Consultants.
Posted by Bryan Hill
Labels: Compliance Program, Compliance Training, Due Diligence, Written Policies and Procedures
