There are a few expressions guaranteed to enrage financial planners. One of these is vertical integration. Many will argue vertical integration means inferior advice and poor products at higher cost. Is this fair?
In some cases yes, but not always. Simplistically, there are three layers in the value chain: manufacture, distribution/advice and the technology in between.
Here, we will call this a platform, albeit the term is becoming more inappropriate as technology becomes more modular.
Vertical integration is where a firm expands up or down the value chain. So, St James’s Place is vertically integrated in that it has funds, its own technology and an advice capacity. Standard Life has a platform, an asset management business and distribution in the form of 1825. Up until the turn of the century, there was relative clarity between manufacture and distribution/advice. Not so today.
My own IFA, Investment Quorum, runs a centralised investment proposition. No surprise there. The CIP is based on money run on a discretionary basis by a highly professional team. IQ does outsource the platform service.
Since most client money is placed in the CIP, is this not vertical integration? Why is a bespoke or model portfolio run by an adviser any less of a product than a multi-asset fund run by an asset manager? After all, from the client viewpoint, they are pretty much the same.
Indeed, I could go as far as saying all IFAs running model portfolios are vertically integrated, as they are performing the key roles of investment product manufacture, asset allocation and fund selection.
There is no doubt many vertically integrated firms have put margin ahead of customer. Finding the charges of most major wealth management firms is impossible. Research suggests they are typically high. That is not to say all are expensive or lack transparency.
My colleague Heather Hopkins reckons change will occur, as there is a potential read-across from the Royal Commission in Australia causing much concern at some major vertically integrated players.
The regulator has shown interest. Mifid II should be shining a bright light on charges and none too soon. However, the FCA has a preference for big players, as they are much easier to regulate.
The delay in enacting the findings of its asset management market study confirms its reluctance to actually do something. The current trend is for more reviews and consultation.
A major wealth manager responding to criticism of high investment charges recently commented that these charges also paid for distribution. Now, as far as I am aware, such cross-subsidy is not allowed, yet it happens.
I have no problems with vertical integration. However, I do have a problem with lack of transparency, with lack of full disclosure and with charges so high that typical investment returns will be eroded to virtually nothing.
Let’s hope 2019 is the year when charges become reasonable and transparent, and when the regulator hammers any firm that does not treat its customers fairly.
Clive Waller is managing director of CWC Research