Fund Due Diligence for Wealth Advisers: A Practical Framework

The Question You Must Be Able to Answer

Under Consumer Duty, the question is no longer “did I do my research?” It is: can I show, in writing, that this fund is likely to deliver good outcomes for the target market, at a price that represents fair value, with risks and charges that have been understood and justified?

Most adviser firms have a fund selection process. Many would struggle to produce the evidence the FCA now expects if asked in a supervisory visit. This is a framework for closing that gap.

Why Fund Due Diligence Has Become Harder

Three things have changed at once.

First, Consumer Duty has lifted the evidential bar. Advisers must now demonstrate fair value at the product level, including the funds inside a portfolio or MPS.

Second, the fund universe has exploded. There are over 4,000 UCITS funds available to UK retail investors, before you add investment trusts, ETFs, and structured products. Relying on a handful of platforms’ “preferred lists” is not the same as doing your own work.

Third, the behaviour of funds has become more opaque. ESG overlays, thematic tilts, and derivative-based exposures mean two funds with similar names can deliver radically different client experiences. The old trick of screening by sector and peer-group quartile catches less than it used to.

Against that backdrop, a documented due diligence framework is no longer a nice-to-have.

The Six Pillars of Fund Due Diligence

A complete assessment covers six areas. Skipping any of them leaves a gap that will either hurt a client or show up in a compliance review.

1. Mandate and strategy

What is this fund actually trying to do, and does its behaviour match the marketing?

• Read the full prospectus, not just the factsheet.
• Identify the benchmark and ask whether it is appropriate to the stated strategy. A global equity fund benchmarked against a UK index is not what the marketing implies.
• Check the portfolio construction rules: max single holding, country and sector limits, use of derivatives, permitted leverage.
• Verify that recent holdings match the stated strategy. A “UK smaller companies” fund with 40 percent FTSE 100 exposure is mis-labelled.

Much of this is visible in the KIID and annual report. The effort is in reading them with a sceptical eye rather than accepting the manager’s summary.

2. People and process

Funds are run by people, and people change firms.

• Who is the lead manager? How long have they run this fund? What is their track record at this and previous firms?
• Is there a named co-manager or deputy? What happens if the lead leaves?
• Is the process documented, repeatable, and enforced? A process that relies on one person’s judgement is a different risk from one with investment committees and hard-coded rules.
• How is performance attributed? If the manager cannot explain their own outperformance, it is usually noise.

A fund with strong five-year numbers under a manager who left 18 months ago is not the fund the numbers describe. Always check the start date of the current team against the performance period being quoted.

3. Performance, properly measured

Raw performance is the least informative part of due diligence and the most overweighted by salespeople.

What actually matters:

• Performance against the stated benchmark, not a favourable one.
• Performance against a relevant peer group (the Investment Association sectors are the usual reference).
• Risk-adjusted returns: Sharpe ratio, information ratio, maximum drawdown, capture ratios in up and down markets.
• Consistency of outperformance: rolling three-year numbers are more informative than single trailing windows. A fund that has beaten its peers over five years because of one enormous 12-month run is not the same as one that has quietly added 50 bps a year for a decade.
• Performance in stressed markets: Q1 2020, Q4 2018, Q3 2022. How did the fund behave when it was hardest to hold?

4. Risk

Headline volatility numbers hide more than they reveal.

• What is the true liquidity of the underlying holdings? Daily dealing on a fund that holds illiquid small caps or property is a structural mismatch waiting to happen.
• What is the counterparty exposure? Synthetic ETFs, securities lending programmes, and derivative-based funds all carry counterparty risk that is not visible in headline volatility.
• What is the currency exposure? An “unhedged global equity” fund is also a currency bet whether the client wanted one or not.
• What is the concentration? A fund with 90 percent of its assets in its top 20 holdings behaves very differently from one with 300 equal-weighted positions.

Research suitable for multi-asset class portfolios typically demands a deeper risk assessment than single-asset funds, because the correlations between sleeves drive the client experience more than individual component volatility.

5. Costs and fair value

Fair value under Consumer Duty is not just “are these charges average for the sector”. It is whether the charges are justified by the service and outcomes the client actually receives.

Component	What to review
Annual Management Charge	The manager’s share; compare to strategy peers
Ongoing Charges Figure (OCF)	Includes operating costs; this is the number that matters
Transaction costs	Published separately; high turnover funds carry hidden drag
Performance fees	If present: hurdle, high-water mark, symmetry
Platform and custody layer	Sits outside the fund but is part of the client’s total cost

A 0.75 percent active OCF may be excellent value for a specialist emerging markets strategy with genuine alpha. The same 0.75 percent on a fund that closet-tracks the FTSE 100 is a fair value failure by definition.

6. Governance and regulatory standing

• Is the ACD or AFM well-established and properly resourced?
• Has the fund been subject to any regulatory action, temporary suspensions, or gating events?
• What is the depositary or trustee arrangement?
• For offshore funds, what is the recognition status under the Overseas Funds Regime?
• For newer funds, what is the seed capital, and how stable is the asset base?

A fund with GBP 30 million in assets has different operational economics from one with GBP 3 billion. A small fund is not automatically bad, but it deserves a question about viability.

The Documentation That Actually Meets the Standard

The common failure is not doing the work; it is doing the work and leaving no trace.

A compliant due diligence record has four parts:

1. The universe considered. What funds were on the long list, and how was the long list constructed? “All IA Global funds with a three-year track record” is defensible; “funds our platform happens to offer” is not.
2. The screening criteria applied. Quantitative (performance, charges, size, volatility bands) and qualitative (manager tenure, process, ESG approach if relevant to the client).
3. The evidence gathered on the shortlist. KIID, factsheet, prospectus, manager meeting notes, independent research (FE fundinfo, Morningstar, RSMR, Square Mile).
4. The conclusion and the reasoning. Why this fund, for this target market, at this price point, in this portfolio role.

Keep this in a single document per fund per review cycle. It should read as a coherent argument a compliance reviewer can follow, not a dump of spreadsheets.

Linking Due Diligence to the Client Proposition

Due diligence on its own does not meet Consumer Duty; it must connect to the target market.

A fund that is excellent for a GBP 2 million HNW client with a 20-year horizon may be wholly unsuitable for a GBP 50,000 retail client with a three-year horizon. Your research should state explicitly which client segments it is appropriate for and which it is not. This is the bridge to what HNW clients actually want from their adviser and how the fund fits that proposition.

For firms using a model portfolio service or bespoke structure, the due diligence extends to the portfolio-level question: why do these funds sit together in this way, and why is this combination likely to deliver the stated objective?

Ongoing Oversight, Not One-Off Approval

A fund on the panel is not settled forever. Monitor continuously for:

• Manager departures or team changes
• Style drift visible in holdings
• Sustained underperformance (usually three years of bottom-quartile numbers)
• Material changes to charges
• Corporate events at the ACD or asset manager level
• Breaches of internal tolerance thresholds

Set numerical triggers up front (e.g. a fund on watch after four consecutive quarters of second-half peer-group performance). Triggers remove judgement at the moment of weakness and force a review that might otherwise be postponed.

Check the FCA Financial Services Register annually for any regulatory changes to the ACD or lead manager.

Red Flags That Should Disqualify a Fund

Over the years, certain patterns have proven reliably negative:

• Marketing emphasises past performance without benchmarks
• Manager cannot articulate the investment process without jargon
• Portfolio holdings do not match the stated strategy
• Concentration of assets in one or two clients (single-client gating risk)
• High redemption penalties or soft close provisions used as retention tools
• Performance fees without high-water marks
• Frequent strategy drift disguised as “evolution”

Any single one is a reason to dig deeper. Two or more is usually a reason to walk away.

How This Sits Inside a Practice

Fund due diligence is one of the most easily outsourced investment activities, which is why so many practices do it poorly. A robust internal process, or a well-governed outsourcing relationship with a DFM or research provider, is part of what makes a firm institutionally creditworthy.

For firms thinking about building enterprise value in the practice, documented research processes are one of the assets an acquirer checks most carefully. A practice that can show five years of contemporaneous fund research files is worth materially more than one whose investment process lives only in partners’ heads.

The Standard Is Now Evidence, Not Intention

Good intentions about fund selection have never kept anyone out of trouble. What keeps a firm, an adviser, and a client safe is a documented process that is applied consistently and reviewed regularly.

The framework above is not complicated. The hard part is doing it every year, on every fund, with the same rigour. The firms that will still be thriving in a decade are the ones that made this a routine rather than a one-off effort.