Thanks to technology, a majority of the gathering and reviewing of information during the due diligence process can typically be done so remotely by officers or committees of the broker-dealer. However, an operational due diligence process is not complete without an on-site visit.

Why is On-Site Due Diligence Important?

It is very important to personally meet sponsor executives in their offices, especially when they are in the process of engaging the sponsor for the first time. On-site visits of product sponsors are becoming more prevalent and essential because some managers will only allow for certain sensitive information to be reviewed onsite.

Consider the Advantages…

Making the time to go on-site and meet in-person has considerable advantages over performing the review remotely over conference or video call. Here are a few things to consider on why performing an on-site due diligence inspection is best practice:

  • Once on-site, due diligence officers can determine rather quickly if the department processes and risk management systems are actually in place and functioning or not.
  • During a face-to-face meeting with new or relatively new sponsors, due diligence officers can get a sense for the people, their integrity, and the company culture while interviewing management.
  • Meeting with sponsor management can give the due diligence officer a “feel” for management. For example, the CEO’s integrity, character, passion, and intensity with which they take their responsibility to investors can be more transparent in-person interview as opposed to a conference or video call.
  • Due diligence officers might also want to consider doing on-site visits with the third-party manager’s service providers, such as custodians, auditors, and fund administrators. These tools are designed not only to gather information about a manager, but also to ensure that such information is consistent with what the manager is saying.
  • Meeting sponsor management face-to-face in their office might also allow due diligence officers to see through the marketing hype and see their reactions to tough questions.

Conclusion

In conclusion, conducting due diligence on-site does not guarantee that a product sponsor can avoid having to face any operational failures experienced by its underlying managers. Such efforts, however, go a long way towards demonstrating that the advisor has fulfilled their fiduciary duty to their clients in conducting proper due diligence.

To check out our previous blog posts on due diligence, click here.

Click here to read FINRA’s 2018 examination findings on reasonable due diligence findings.