Graham Bentley: Why you should challenge providers on investment due diligence


My Grandparents were born at the end of the 19th century, and retained that period’s predilection for living rooms cluttered with bric-a-brac. I have a vivid memory of a brass ornament featuring three monkeys, hands covering their respective ears, eyes and mouth. The plinth on which they sat bade the observer to “hear no evil, see no evil, speak no evil”.

Far from being a moral directive, my grandfather – a First World War veteran and admittedly no apologist for the establishment – countered that it illustrated the tendency for the privileged to deal with impropriety in their ranks by refusing to acknowledge it.

I was reminded of his exposition when I recently read a tweet from an employee of a Sipp provider, following the historic FOS decision on Berkeley Burke Sipp Administration. You will recall the Ombudsman had found in favour of an unadvised client who had lost his capital as a result of the failure of a certain unregulated investment scheme held within his SIPP. 

The employee opined that providers should not be tasked with performing due diligence on funds; that they were simply the vehicles through which clients’ investment objectives were accommodated, and hence the advisers sole responsibility. I have since observed other providers’ hand-wringing, their bleating that they do not give advice, or that their sole suitability check is whether the investment meets HMRC rules, and so on.

Well, that ignores a basic premise. Providers should “do the right thing”, even if it means rejecting business from time to time. Caveat emptor should not be a defence. In most cases the Sipp provider is the trustee and has a duty of care to the beneficiaries, i.e. the clients.  Recognizing this, some providers are calling for a permitted investments list. This is both an unnecessary constraint, and in any case a cop out, reflecting the providers’ general and acute lack of in-house investment expertise and experience.

This particular shortcoming appears to be recognized by the regulator. The FCA’s recent review found that operators failed to undertake adequate due diligence despite being aware of the FSA guidance originally published two years earlier. It said that it also found that most firms do not have the expertise or resources to assess this type of business, yet allowed transactions to go ahead.

Don’t imagine this issue just applies to Sipp providers. A significant number of fund supermarket and wrap platforms have over the years been quite specific in absolving themselves of responsibility for the propriety of funds on their platforms, proclaiming their open architecture credentials and hence no limits. A number of them even crafted this “zero touch” approach into a virtue; disingenuously professing to be the adviser’s best mate by not interfering with whatever foolhardy fund faux pas the adviser appeared to be committing, and promising to add funds at the drop of a hat (or the promise of a £5k ISA).

During my tenure at Selestia and Skandia I recall rejecting (amongst others) such notable subsequent car crashes as DWS Ratebuster, Life Settlements funds and Arch Cru following an initial (and lengthy owing to distinct lack of cogent information) due diligence process. Advisers berated the SIS platform for being slow to add funds; one adviser raged at me directly for not adding Arch Cru to the platform, adding it was not my place to stop him making an investment, and threatening to take his clients off the platform. That platform may not always have been the speediest adopter of funds, but that simply reflects the depth of due diligence being done by a team who know funds inside out.

I suggest all advisers challenge the investment due diligence process of their provider. From your point of view, what is the risk of using a fund, regulated or otherwise, rather than not? Can you defend its inclusion? Robust due diligence on funds, performed by a competent and knowledgeable provider, is a valuable backstop. Don’t use providers who utilize the “three monkeys defence”. 

Graham Bentley is managing director of gbi2