Third-party private credit provider due diligence essential for advisers

Appearing on The ifa Show podcast, principal research consultant at WealthVantage Partners, Ben Walsh, highlighted some of the issues surrounding the private credit market.

“To put it bluntly, Australian distribution doesn’t like having to pay for functions like credit rating,” Walsh told the podcast.

“Also, it’s the unsophisticated nature of Australian credit markets. Corporate markets in Australia have tried to establish themselves for a long time, and it’s just never really taken off.”

This means that many firms rely on internal rating systems – something that can be problematic when assessing the quality of a private credit product.

“You get individual firms having their own methodologies, their own ratings – and of course, all of them think they do a wonderful job, which most people do believe about their performance at work.”

Walsh added: “But without a dedicated third-party rating system like Moody’s or S&P, et cetera, Australia is badly behind the ballgame.”

For advisers, this creates problems when looking for private credit products to recommend to clients, as they must rely on internal rating systems and lack the guidance of industry-wide standards.

For Walsh, this means advisers need to conduct their own due diligence on any third-party reports and recommendations.

“If people are telling you to rely on a third-party report, you need to be suspicious of anything that is a high-margin product,” Walsh advised on the podcast.

Asking basic questions about the third party is one method Walsh believes to be effective.

“Who are these people? What do I know about them? What can I learn about them? What are their backgrounds? What’s their stability? Are they new to this industry? How long have they been there? Do they really have expertise in this?”

“Those traditional questions still have merit.”

Maintaining strong personal relationships – like in all aspects of advising – is also important, according to Walsh, who noted that advisers should be suspicious of businesses that experience a lot of internal movement.

“These people can change camps and move around, particularly people who aren’t running great shops,” Walsh said.

“It’s a little bit like the people off A Current Affair – you know, they only move around to pull the stunts they’ve been pulling under other names.”