Due diligence is not a “nice-to-have”: It’s a legal duty

South African clients are living through an era of product proliferation, offshore access and slick marketing. In this environment, financial advisers and anyone performing a fund-selection function cannot treat due diligence (DD) as an internal checklist or sales aid. It is a legal obligation grounded in South African law and mirrored across English-speaking jurisdictions. Failure to meet it has led to Ombud determinations, tribunal scrutiny and enforcement action.

What “due diligence” means in practice

At its core, DD means you understand the product/manager you recommend and the client you recommend it to, and you document both. In South Africa, the General Code of Conduct under the FAIS Act requires providers to act “honestly, fairly, with due skill, care and diligence” (s2), assess suitability through a needs analysis (s8), and keep a record of advice showing the information considered and the basis for the recommendation (s9).

This is not theoretical. The FAIS Ombud and courts have repeatedly linked unsuitable advice and poor product research to breaches of these provisions. In Impact Financial Consultants CC v Bam NO (SCA, 2021), the court held that the adviser failed to conduct a proper needs analysis before steering a client into a high-risk investment. This was conduct criticised under section 8 of the Code.

Recent South African context: what happens when DD fails

South Africa has seen multiple determinations where advisers were held liable for promoting high-risk or inappropriate schemes without adequate research:

• In a FAIS Ombud matter involving worthless options, the Ombud found the respondent “failed to exercise the required due diligence to ensure that he actually understood what he was dealing with.”
• Determinations around property syndications (e.g., PIC/Highveld cases) criticised advisers for recommending products without verifying fundamentals and for poor records supporting suitability.
• Other determinations explicitly record that advisers “did not provide any evidence that [they had] conducted proper due diligence.”

The body of casework illustrates the regulatory expectation: you must know the product/manager, the risks, the structure and the client and then create an evidence trail.

Enforcement remains active. The FSCA’s regulatory action reports emphasise misconduct themes including due-care failures and product-governance weaknesses, and it has called for information where FSPs may have funnelled clients into problematic schemes (e.g., the BHI Trust matter).

The wider common-law world says the same thing and will lead regulation and enforcement in SA

Global jurisdictions have similar requirement for adviser due diligence:

• United Kingdom (FCA): COBS 9A & Consumer Duty raises the bar on product governance and client outcomes.
• United States (SEC): The Advisers Act.
• Australia (ASIC): The Corporations Act s961B and ASIC RG 175
• Canada (CSA): The Client Focused Reforms & Know-Your-Product.
• New Zealand: The Code of Professional Conduct for Financial Advice Services.

The message is consistent: if you recommend it, you must have investigated it and be able to show your work.

A practical DD framework for recommending asset managers

Below is a field-tested checklist aligned to FAIS and comparable international standards. Use it for initial selection and ongoing monitoring:

1. Legal & licensing

2. Verification

Verify the manager’s regulatory status, FSP licence, approved funds (CISCA), and any exemptions or conditions. Document checks and dates.

3. Ownership, governance & people

Map ownership, key persons, succession, investment committee minutes, KPIs and turnover.

4. Investment process & edge

Evidence of a consistent philosophy; idea generation, research depth, portfolio construction, risk budgeting and sell discipline.

5. Track record & risk

Analyse time-weighted returns vs. appropriate benchmarks, downside capture, drawdowns, factor exposures and style persistence. Avoid performance-only selection.

6. Operational due diligence (ODD)

Compliance testing, disaster recovery, cybersecurity, audited financials.

7. Liquidity & pricing

Liquidity profile vs. mandate; gating provisions; fair-value policies; side-pockets; pricing sources.

8. Fees and alignment

Full fee stack (incl. platform/LISP layers and advice fees), performance-fee symmetry, hurdle/high-water marks; conflicts management.

9. Regulatory, legal & reputational

Complaints, Ombud matters, enforcement history; PEP/sanctions screening; media sweeps; documentation of any adverse findings and mitigants.

10. Client fit (suitability)

Tie the manager/strategy to the client’s goals, capacity for loss and investment horizon; complete and keep the record of advice

11. Ongoing monitoring cadence

Set review cycles; define red flags that trigger reassessment (personnel departures, drawdowns beyond X%, process changes, audit qualifications).

Documentation: your best defence

When the Ombud or FSCA asks “Why did you recommend this manager for this client at that time?” your record of advice must answer with evidence: what you reviewed, when, and how it informed the recommendation. The Code (s9) explicitly requires this.

Note for South African practitioners

South Africa’s FAIS Act and the General Code of Conduct are unambiguous: you must deliver advice with due skill, care and diligence, conduct a needs analysis before advising, and keep a defensible record of your rationale.

Recommendations before you recommend an asset manager:

• Adopt a written DD policy that maps to FAIS Code sections 2, 8 and 9 (duty of care; suitability; record of advice).
• Use a dual-track review: investment due diligence and operational due diligence; sign off both.
• Maintain a product universe with stop-lists for unapproved or non-compliant products (especially offshore CIS not approved under CISCA).
• Evidence everything: minutes, data sources, third-party checks, and the client-specific linkage in your ROA/SOA.
• Review and re-paper after material changes (team, process, risk, drawdown, audit flags).
• Train and test: make DD competence part of KPIs for advisers and investment committees.

Getting DD right is not only good risk management. It is compliance with South African law and aligned with global best practice. Your clients, your licence and your reputation depend on it.