Investment Due Diligence: DIY or Outsource to Experts?

Posted by Freedom Advisors on May 13, 2024 6:31:52 AM

In the fast-paced world of financial advisory, staying ahead means more than just keeping up with market trends. It means conducting thorough due diligence, both in your own processes and in the products and services you recommend to your clients. As an independent financial advisor, the responsibility falls squarely on your shoulders to ensure that your clients' interests are protected and their financial futures secure, but that doesn’t mean you should try to do it all yourself.

How do you approach due diligence? Are you conducting it yourself, or do you rely on a team of experts to navigate the intricate web of financial products and services?

The Solo Approach:

For some independent advisors, the solo route for investment due diligence is tempting. After all, you're well-versed in investment selection criteria and manager evaluations and conducting due diligence yourself might seem like a primary obligation. Most advisors have the capability, but seeking to do it optimally is an all-consuming undertaking. Financial markets are complex and dynamic, leaders and laggards are fickle, institutional management organizations can be amorphous, and identifying correlations across asset classes, sub-asset classes, sizes, styles, and geographies, and bringing them together in the right mix can be elusive. The most seasoned advisor can overlook crucial details. Conducting due diligence alone may leave you susceptible to blind spots and biases. Most importantly, it takes you away from your highest and best use.

The Team Approach:

Employing a team of experts dedicated to investment due diligence is a strategic move that can elevate your practice to new heights. These experts bring diverse perspectives and specialized knowledge to the table, ensuring that no stone is left unturned in your quest for sound investment opportunities. Whether it's analyzing market data, scrutinizing performance, assessing organizational stability, or assuring regulatory compliance, an expert, dedicated team can provide invaluable insights that enhance the quality of your recommendations.

At Freedom Advisors, we have employed a rigorous due diligence process refined over 20 years to thoroughly vet the money managers and model portfolios available on our turnkey asset management platform (TAMP). Here’s our approach:

  1. Comprehensive Assessment: We conduct a comprehensive due diligence assessment to research the inner workings of each sub-adviser and investment strategy so we understand what trends and market conditions a strategy would be affected by. We understand that not every strategy will perform well in every market condition, so we pay special attention to understanding the investment process and the market conditions for which it was built.
  2. Pattern Analysis: We look to see that a sub-adviser’s investment methodology is based on analysis and on a process that is consistent and can be reproduced. Our goal is to gather insight into how these sub-advisers produced portfolio performance and anticipate future portfolio behavior. In addition, we review both the firm’s organizational structure and its management team to determine if any major changes have occurred because this can affect repeatability. Examples of items we monitor include tenure of management, management responsibility changes, variance in the execution of a strategy, changes in ownership structure, and disaster recovery plans.
  3. Pragmatic Evaluation: How sub-adviser strategies fit together is important to optimize the strengths of each to meet an investor’s goal while mitigating the impact of conflicting strategies. A thoughtfully curated portfolio across strategies and our four pillars of diversification allows each component to complement the others to attain the desired investment result. It is the weighting and the blend of these managers that matters. Each sub-adviser’s strategy plays a critical role in the portfolio, and each has a specific job to do.
  4. Performance Review: We consider performance to be important, of course, but we also consider it to be an outcome of predictability and process. A continued review of performance helps us identify when a strategy is not working as expected.

Our curated model marketplace provides advisors with a vast array of options, featuring over 600 pre-built models from 100 model providers.

Ongoing Due Diligence

If approved and added to the Freedom Advisors Model Marketplace, the money managers and model portfolios undergo ongoing review by the Freedom Investment Committee. We believe in long-term investing and will typically give a money manager a market cycle to navigate different conditions before we determine if they should be removed from the platform.

Getting Started

To help you explore the team approach further and decide what platform is right for you, download our complimentary 30-Factor TAMP Partner Selection Checklist.

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Topics: Business Outsourcing, Investing

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