“Due diligence.” Now that’s a quaint term! Since 1933–when Congress passed the Securities Act–financial firms have been conducting research on the companies whose equities they sell. They don’t do this out of the goodness of their heart. Rather, they do it as a potential defense. If clients accuse them of not disclosing material information, they can use their due diligence as a shield, even if it doesn’t uncover the information in question.
After due diligence became a standard practice in the securities and other industries, the term entered common usage as a synonym for “checking something or someone out.” Even clients tried to do due diligence before selecting a financial advisor or making an investment. At least some did.
That was then. But what about today? I can only conclude that the concept–and practice–of true due diligence is seriously past due. Individual and institutional investors just haven’t shined as adequate a light on potential investments as they used to. And they have suffered huge losses as a result. Two cases in point: