Advisers need to look at the product first and the client second when they are doing due diligence to meet the "very high" standards the Financial Services Authority (FSA) expects, according to Regulatory Legal, a law firm specialising in financial services regulation.
Speaking at a recent event on due diligence, the law firm, which acts on behalf of thousands of clients who claim they were mis-sold investments, warned advisers against over-reliance on product promotions.
Advisers must have a clear "narrative" in place to explain why they chose certain investments in case they find themselves quizzed by the FSA or the courts, the law firm said.
"Advisers do a lot of risk profiling on the client but many don't actually look at the product. It should be the product first," said Gareth Fatchett, (pictured) partner at the firm.
"The FSA and a court will expect a reasonable level of due diligence when an adviser is being paid for their specialism. Just saying that you've looked at the brochure and it seems alright is no good."
Fatchett recommended a product awareness checklist for advisers to follow before investing any clients.
It should include searches on the company the potential investment is in, director searches, and enquiries about the whereabouts of assets.
Advisers should also ask for permission to speak to the firm's accountants and auditors, and if they are refused this should raise alarm bells, the law firm said.
Drawing out on a piece of paper the structure as described by the investment provider is another way to better understand the product, said Fatchett.
The law firm gave a list of warning signs advisers should be on the look out for before they invest a client's money.
Dormant companies, late filing of accounts, multiple directorships and insolvencies of related companies should all be viewed as danger signs.
Directors with a history of insolvent companies, and a company website without the full name of the company or a registered company number and address should also raise alarm.
Sources of information
Advisers can use resources like the Companies House website and credit check sites like Experian and Equifax to find out information on the companies at the heart of investments.
When clients bring investments to their adviser, the adviser has to be bold enough to say this is not appropriate, said Fatchett, or they risk a claim at the Financial Ombudsman Service (FOS), the courts or both.
The ability for clients to get a second roll of the dice was highlighted in the recent case of Clark v Focus Asset Management - where the High Court ruled a couple could pursue their adviser through the courts after being awarded the maximum available via the Financial Ombudsman Service (FOS).
"Judges take a steer from the FOS, especially if they are not familiar with the sector," said Fatchett.
Professional indemnity insurance
Advisers with investments in more esoteric asset classes need to speak to their insurers to see if they are covered, said Fatchett.
"Advisers need to be forward-thinking about their insurance. Insurers will put pressure on you to avoid paying out, especially if you are a small or medium-sized company.
"If you've signed off anything unregulated as low risk, you'll need to renew client files. FOS overturns high net worth and sophisticated investor sign-offs all the time."
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