Vertical integration: It’s about fund flows, stupid

Natalie Holt, journalist with Money Marketing Photo by Michael Walter/Troika

Who wants to become the new St James’s Place? According to industry analyst Ned Cazalet, Old Mutual Wealth does, as does Standard Life, as do all the other traditional life companies making a bid to reinvent themselves.

Cazalet’s insightful reports (or “provocations” as I have alternatively heard them called) have form in making providers and the wider financial services industry sit up and take notice. Cazalet is well versed in knowing what buttons to press to challenge the status quo.

In his latest analysis of the life and platforms market, he is sceptical about whether vertical integration really is the golden goose providers are making it out to be.

One of the arguments centres around profitability – if major advice firms have failed to turn a profit up to now, what makes providers and fund groups convinced they will do so as part of their stable?

The obvious rebuttal is vertical integration is not about profits at all. It’s about fund flows, stupid.

As has been pointed out to me, for an asset manager to be concerned about the money flowing into their investment solutions is hardly a crime. And it is also worth noting some of the investment solutions to emerge as part of this wave of vertical integration may actually be broader in scope than the investment offerings of some IFAs.

But the question is how the in house advice, platform and investment management process is packaged up. Who is the ultimate beneficiary of cost efficiencies and better margins – the shareholders or the client?

Money Marketing understands the FCA has already started to sniff around this part of the market, and asked to see business plans which may include stated quotas on fund flows as part of adviser acquisition deals.

The shift to vertical integration has been pitched as a solution to the dilemma of serving mass market clients in the most cost efficient way possible. That may be true.

But with the best will in the world, the vertical integration trend leaves me with a slightly sour taste. Despite everything firms have gone through with the RDR, the emphasis on professionalism, the move away from providers owning stakes in distribution, we now seem to have come full circle with providers owning advisers outright. The difference is, now they own the platform and the investment management parts of the value chain too.

Natalie Holt is editor of Money Marketing – follow her on Twitter here