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Lee Robertson: The high cost of vertical integration

Lee Robertson

Lines have become increasingly blurred between the various elements and disciplines in the financial eco-system. Back office providers are launching robo-advice services, data providers are launching model portfolios and active and passive fund managers are launching passive and active funds respectively. Meanwhile, adviser platforms are offering discretionary services, fund managers are buying platforms and some fund groups are even talking about adding advice to their offerings.

I should probably not use a term the public might actually understand such as “blurred lines” – far better to dream up something more obscure like “vertical integration”.

Vertical integration is all about securing more of the available fees in as many elements of the advice and investment process as possible. Some of the newer or larger players are marching up and down the process securing more fees by offering more parts of the chain.

Of course, we have seen this all before in other sectors. Supermarkets come to mind immediately. From insurance to estate agency and travel services, they ruthlessly bolt on other elements that used to be the sole preserve of a well trained – but often smaller and less well capitalised – professional.

They seek to preserve their core business and supplement it with other services and income by exploiting their brand to squeeze out smaller operators, all the while hiding behind a wide corporate smile.

It is capitalism I guess but I suspect not always great consumerism. Having looked at the pricing of some of these vertically integrated operators it is clear the supposed cost savings to investors are not materialising. Quite the opposite in fact. High initial charges and ongoing charges, often for relatively simple portfolios being rebalanced annually at best. Or even less welcome, the return of vertically integrated provider funds.

Where and when did best of breed go? Or the requirement for a robust, full and fair due diligence process, not just a check-list that leads to a single in-house fund or portfolio?

I am left increasingly uneasy by the eye-watering annual costs of some of the newer, consolidating players.  How is that they cannot seem to deliver some cost trimmings considering their aggregation of advisers, managers, premises, compliance and so on? How can it be that the investor, the very person we should be valuing and protecting, is now paying much more for what is often a reduced or simplified offering? An offering which seems less nuanced and less able to cope with the often complex real life requirements of the investor despite the implementation of RDR and decades of regulation.

I appreciate there are many truly excellent firms out there – large as well as small – but this is not universally the case. Are the twin drivers of our sector looking to increase profitability and the regulator and government seeking to close the advice gap really worth delivering an inferior service to the one the public previously enjoyed or had access to? I know where I currently stand looking at some of the pricing models I have seen.

Lee Robertson is chief executive of Investment Quorum



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Elegantly put, Lee. However, it does give firms like your and mine another unique selling point.

  2. I agree Lee. Typical charges of one of the main players: 1.25% Total Expense Ratio, lets say a conservative 0.25% to 0.5% for additional portfolio turnover, 0.25% platform costs, 1% adviser charges. You are therefore looking at 2.75% to 3% for a basic strategic asset allocation which can be purchased for less than 0.5% direct via an online platform. In a low inflation, low return world. Can’t see it myself, the industry needs to move forwards, not backwards.

  3. Thanks for taking the time to read and comment gents, always nice to know that some of what I is of some value in the ongoing debate about doing well for our clients. I trust that you are both well and prospering in all the right ways.

  4. What an excellent piece of thought leadership. The irony is that a primary benefit of an intermediated market is to keep people “honest”, and although some of the practices are clearly within regulatory permissions framework, I truly wonder whether they would fail a civil court test with regard to agency / fiduciary responsibility.

    The regulators have a hell of a job on their hands to keep the market operating fairly for consumers. But doing nothing cannot be the answer.

  5. Couldn’t agree more, except for one point.

    They are delivering ‘cost trimmings’, although these are not being passed on to the investor. Let’s not confuse cost with price.

  6. Bogle said it in 96 and it is still very true now. The vast majority of the financial industry is asset gathering with precious little consideration to the actual unit holders of those assets.

    Do Old Mutual, Standard Life, SJP, etc pass back any of their scale? Nope, they encourage portfolio turnover, and increase costs. Their profits increase at the expense of their unit holders.

    Lets face it, a few bps on platform costs makes very little difference when you are already paying top quartile fund charges on increasing assets.

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