What You Need to Know
- Advisors need to keep an eye on third-party providers as part of their operational due diligence.
- A thorough ODD program includes a review of service provider risk management documentation.
- Periodic onsite visits can provide access to additional investment staff and further insight on daily operations.
Many RIAs use third-party research and sub-advisory services providers to support their investment platforms. While RIAs typically excel at identifying competitive service providers, they may fail to implement robust operational due diligence (ODD) programs to review how these firms manage their own operational risks.
An effective ODD program takes a close look at the service provider’s business, compliance and operational risks to identify red flags.
Why Conduct Due Diligence?
Maintaining an effective service provider due diligence program is essential. In accordance with guidance from the Securities and Exchange Commission and the states, RIAs owe a fiduciary duty to clients to act in their best interest. This duty obligates firms to perform due diligence on service providers providing certain services that support advisory clients.
While such services can be delegated, RIAs must still oversee them. RIAs that fail to establish sufficient oversight programs risk violating regulatory requirements. That is, the SEC may assert that the firm has insufficient procedures to address service provider oversight.
A robust ODD program provides more oversight, helping you avoid potential civil and regulatory liability, in addition to reputational harm.