The due diligence requirements of the financial-services industry have become dynamic. Our objective is not to make you an expert; your expertise is in client management. Rather, our objective is to give you the tools to build a defensible position. Documentation is the key to your defense. Having an organized set of files with your information dated and noted will move the discussion from dispute resolution to more productive uses of your time and expertise. Below are several issues you should consider as you build a file. This is a starting point to give you some direction. What you include and the direction(s) you go are a function of your interests, experience, and market.

Due diligence can be broken down to three processes:

  1. Research
  2. Verification/validation
  3. Analysis

We’ll cover the last item—Analysis—in Part Five of this series. 

Research should begin only after you have convinced yourself that the investment (securities, vendor, hardware, staffing, etc.) makes sense now. Research is nothing more than an investigation of the issue. To move forward with a time commitment you should first answer these questions:

  1. What is the origin of this concept? What is causing interest? Note the day and the circumstances that led you to this issue. (TV program, training session, informal discussion, wholesaler visit, client discussion, etc.) You will be asked this by Regulators and litigators will definitely ask you this. Start your file with this notation.
  2. Will this commitment conform to your views of the market/environment for the time frame it will require? Is it consistent or inconsistent and a potential hedge?
  3. What is the catalyst of this opportunity? Demographic shifts, economic shifts, regulatory changes, or technological/operational changes?
  4. What is the history of the industry? The company? The officers?
  5. Is there a governmental angle? Regulations, tax codes, government mandates? (Don’t count on the government to  drive the success of your investment in your anticipated time frame.)
  6. How will prevailing trends affect the investment? Will it lead, supplement, leverage, or trail the marketplace? This will provide you with insights as to the risk the company will take and where on the risk spectrum you should place this commitment.
  7. Does it have a seasonal or cyclical orientation?
  8. What public information is available to read and study? Does the investment look like something you have seen before? Similarities? Differences? (WARNING! Falling in love again is counterproductive to objective due diligence.)
  9. Audited financials. How old are they? Do they include this issue (security, product, strategy)?
  10. What research is available from independent sources? (Moody’s, S&P, Value Line, Consumer Reports, etc.)
  11. What is available through your firm? (policy memos, paid research, etc.)
  12. Does your E&O insurance policy exclude coverage of this: industry, company, structure, security, product, etc?
  13. Does your firm or licensing exclude involvement in this structure/security/product, or industry?

Verification/validation should be done during research. This is simply finding the same facts from several sources. Opinions have value if you consider the source to be reliable and qualified. Consider potential conflicts of interest. (For example: the Presidents’ mother is probably not very objective, in spite of the length of her association.) This effort is of little value without documentation. You must be able to demonstrate what you know and when you learned it. If this sounds like a legal position, it is. In an inquiry, no one cares about your opinion or what you say you know – only documentation is omnipotent.

  1. Conduct a Google search of the company and its key officers. (There is nothing more embarrassing than for a client or regulator to point out a past indiscretion they found after a quick Internet search!)
  2. If there is a Governmental angle (regulatory, tax, or restriction), print it out and keep it in your file. Print out any articles, white papers, or reports on the legislation or mandate.  Make sure you can explain it in a quick “elevator speech”.
  3. What do your peers think of your concept? Get their honest feedback. Weight it based on experience, knowledge, and trust.
  4. Compare and contrast articles and reports on the industry and company. Look for outliers to your basic research and be careful of the prejudices and agendas of the authors and speakers.
  5. Verify that your WSP’s (Written Supervisory Procedures) do NOT preclude you from taking or recommending this position. When in doubt, get a formal opinion in writing.
  6. Verify from Compliance and Supervision that there are NO licensing limitations from pursuing this concept.
  7. Review your E&O insurance policy to verify that this activity is NOT excluded from coverage. (Always keep a current copy of your E&O insurance policy in your desk files.)

The purpose of this exercise is to provide you with a defensible position.  It makes little difference whether you are researching a private placement or hiring an assistant. Your analysis is dependent upon the inputs you accumulate. There are too many day-to-day interruptions and vagaries to try to remember every conversation, article, or document you review. Keep a copy of everything and make notes on it to demonstrate your review and time line.

The next step in due diligence is analysis. We will address this in Part 5 through the use of a methodical procedure you may already use in your sales processes: a SWOT analysis. Stay tuned!

Editor’s note: Watch for further installments in this “Bulletproof Practice” series, provided courtesy of Doug Schriner, president,  FA Risk Management. 

FA Risk Management, Inc. is a member organization providing education, counseling, and financial support to registered professionals, improving the outcomes and reducing the costs of client complaints. To learn more, visit its website.

For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.