Imagine you run a small sandwich shop. One day, you decide it is time to start making and selling your own bread as well. You’ve got just enough space out back, and enough repeat customers to sustain your normal sandwich-based business while you set up the bread side of the operation.
In theory, customers could get a great deal here. They no longer have to walk down the road to the supermarket – or the artisan bakery, depending on their price point – for their daily bread needs, and they clearly like bread anyway given they’re eating sandwiches, so why not offer a discount since you don’t have the overheads of a massive bread manufacturer?
But there’s a problem here. What if I like supermarket own-brand bread? What if I just want a sandwich, not a loaf? I don’t want to pay a mark-up on my sandwich for that. You’re a small operation, so you can only produce so much bread.
You’re not an expert in bread making, and you won’t have the same quality control as a mass producer. Bread making might take time away from what you’re really great at – making awesome sandwich fillings. Because you’ve had to buy lots of bread-making kit, you’ll have to focus on making it worth it, so are probably going to only produce some sourdough or other premium-price types of loaf, which won’t suit the majority of clients’ tastes. After all, there’s no point making the bread if you aren’t going to find ways to get people buying it at the right price.
This is the best analogy I could come up with for the state of vertical integration – linking advice and product manufacture – in the financial planning market today. There is a serious debate to be had as to whether the theoretical benefits of simplified customer journeys and cost reductions through scale are being borne out. Our cover story this week hopes to put that debate into context and show just how far in the journey we have come. Frankly, there are now very few examples of sizeable financial planning, platform- or product-manufacturing businesses that don’t have a finger in another element of the pie in one way or another. It’s just that you, and their clients, might not be aware of the extent of the links.
To be clear, I am not saying any or all of these models are bad. I’m sure some provide exceptional service to clients. But getting information about the extent of ties between different parts of the value chain can be very difficult.
I would really like to see the mass disclosure – to potential clients and ourselves in the media – of data like the proportion of in-house fund flows coming from advisers within the same group, or the exact remuneration structures for advisers when it comes to long-term incentives to stick with the group’s own products. The proof is in the pudding. Or sandwich. It is time to see behind the counter.
Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1