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Blog: What next for vertical integration?

Is it inevitable that all large life and pensions companies will look to become vertically integrated? It certainly seems the tide is shifting that way.

Prudential, not content with quietly building up its advice arm to more than 300 advisers over the last few years, announced yesterday it wanted to fully integrate its asset manager M&G through a merger.

M&G Prudential’s bid to house asset management, savings and advice under the same roof comes hot on the heels of fellow life company Standard Life’s bid to add Aberdeen’s investment power to its own newly spawned advice arm.

Even Schroders confirmed it was interested in flexing its distribution muscles late last year by taking a stake “significant” stake in network Best Practice.

With Aviva also recently reopening its advice arm, it seems that Aegon and Royal London are the only two significant holdouts left against the vertical integration mood music. Though both obviously care about the future of their platform businesses, they are keen not to be seen as competing with IFAs.

While running a very successful vertically integrated model currently, Old Mutual’s break up of its business may look like a shift away from this, but it has just bought the Caerus network to get even more advice on board.

The question then, is why are the rest of the crowd moving so decisively towards a vertically integrated model?

Cost savings are a huge driver here. Standard Life Aberdeen is hoping to shed £200m a year, roughly equivalent to its profits for half a year. By 2022, M&G Prudential wants to save £145m a year.

But with the savings will come redundancies: 800 for the Standard Life Aberdeen merger. We’ll have to wait and see how many M&G Prudential estimates.

The rumblings of regulation

A couple of recent results announcements show that a principal issue with vertical integration – that the cost of advice is subsidised through fund or platform charges, allowing firms that own a distribution chain to gain competitive advantage – persists, despite the FCA attempting to give further clarity on its rules.

St James’s Place reported a £27.1m loss from its advice business last month, up from £19.2m. Intrinsic’s results this morning show a £13m loss, up from £9m.

Both have argued that the Financial Services Compensation Scheme bills that are charged to their distribution businesses are largely to blame for this situation, but, stripping these out, both still make a trading loss, and it will be fascinating to see for how long they can continue to do so before registering on the FCA’s radar.

The FCA’s rules were meant to allow small firms and challengers leeway to make a brief loss on advice before they matured. No-one could argue that SJP and Intrinsic aren’t mature businesses.

Standard Life’s also 1825 lost £5.6m in its first 16 months results to the end of December show. You could make the argument that the business itself is not mature, but its parent is.

One of the few possible upsides would be if this cross-subsidy filtered into lower advice charges. Over to the vertically integrated firms to deliver on their promises on better customer outcomes.

Justin Cash is Money Marketing’s News Editor. He can be found on Twitter @Justin_Cash_1



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. If these businesses are loss making then it is difficult to see how lower advice charges will emerge – surely the opposite is necessary, unless they can find significant areas for cost reduction? A better argument is to find ways to reduce the cost of advice whilst maintaining charges at current levels – lower pay will be tricky but not insurmountable, better use of technology is an obvious one (but comes with heavy one-off costs), better segmentation is always a good one………..sadly we’re not at the point where enough customers will engage online to really drive the cost of advice down. The banks have been through this (very painful) journey. Reality is that it is very difficult for large firms to make money from advice – small firms have a cost advantage in that respect. Being owned by a large parent means the advice firm has to carry some additional corporate overhead, making it even more difficult to break even. Time for a new model………or a dramatically more efficient one with much more sharing of capability across the market..

  2. Robert Milligan 11th August 2017 at 1:15 pm

    How is that both SJP & Intrinsic both with higher than normal up front charges are showing such losses! Surly they are both Tied Agents of thier parent Group, and as with Barclays dropping the Woolwich name, These two should do so. And be Honest about your tide status.

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