Due Diligence

If you have heard the term “due diligence” and are confused about what it means, I’m not surprised.

When I was a young attorney starting my first job at a large New York law firm, I was given an airline ticket to the Midwest and told I would be doing “due diligence” on a company. I was terrified I would completely fail at the job since I didn’t know what “due diligence” was. I learned pretty quickly that due diligence described a process of investigation. In the context of my legal work, this meant I needed to learn everything there was to know about the company.

I have found that due diligence doesn’t need to be confined to legal work. In fact, the investigative process of due diligence is a very handle tool to use in life. You probably use it all the time—another word for the process would be common sense. Suppose you want to buy a car. Your process would be to look at all the new cars and their features, figure out what you liked and why, probably test drive a vehicle, do comparison shopping on price. You may do some research on the type of car you want on the Internet or through a “Consumer Reports” magazine. Armed with all of your “due diligence” you will approach a seller of the vehicle and use all your newfound facts about the car to engage in negotiation over price. That’s the kind of process involved in due diligence investigations.

The very unfortunate fact is, however, that even though most of us understand how to do a due diligence investigation, we do not use our knowledge when we are making major life decisions. I have seen more attention paid by clients to picking a new car than to picking an investment advisor. Why? Perhaps it is that we feel more comfortable with our ability to investigate a car than an investment advisor.

My advice is do not be intimidated by subject matter. After all, if you can investigate a car, you can investigate an advisor. Think about this process in the same way. Start by looking for advisors who work in your area. Ask your friends and neighbors, your banker, your insurance agent and anyone else involved in finance whether they have heard about the advisor and what they have heard. Read all about the advisor. Check out the online reports on the advisor to see if anyone has ever made a complaint against them—these are all available free to you. Meet with the advisor, but not for the purpose of signing up to anything. Meet for the purpose of doing your due diligence investigation. Ask about the advisor’s experience, the types of clients they have (especially in your age group), the approach they use to investing, the processes they have in place to communicate with you on a regular basis. If the advisor starts to advertise the rates of return they can give you if you put your money with them, turn around and leave immediately. First, such advertising is illegal. Second, neither they nor anyone else can guarantee results. What you want from an advisor is a common sense approach. Ask if they allocate assets. If they do not, turn around and leave. Any advisor who doesn’t know about asset allocation as the primary factor in good investing is not worth talking to. You may not have a complete understanding about the exact investments recommended by the advisor but you ought to be able to become comfortable that the advisor will act in your best interests. Never hire an advisor with whom you do not feel comfortable.

The due diligence approach can be used for any other life events. Suppose you decide to open a business. Before you commit, you need to do a due diligence investigation of your idea for a business. If the business involves food service, for example, what experience do you have in that type of business? Do you know what it costs to set up a food service business; how to hire and manage employees or how many you will need; how to arrange for suppliers and who to select; where the business will be located, what terms of lease you are willing to agree to, what advertising costs will be required, etc. The reason professionals recommend you have a business plan for any new or existing business is so that the plan will answer all of these (and more) due diligence questions.
See how simple the concept is? The next time you meet with someone, whether buying a car or seeking an advisor, tell them you just have a few questions to complete your “due diligence” process.

Lyn & TeddyAbout the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at LegalStriegel.com.). Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.