Advisers have called on vertically integrated firms to reveal more information on their in-house investment propositions.
In recent years there has been a growth in firms expanding across the distribution chain, with providers restarting pushes into advice, and advice firms designing their own investment channels.
Money Marketing approached a mixture of eight providers and networks that offer in-house funds through the advice businesses they also run.
These included Prudential (which runs both Prudential Financial Planning and M&G), Aviva (which runs Aviva Investors and has in-house advisers) and Quilter (formerly Old Mutual). Quilter operates the Intrinsic and Old Mutual Wealth Private Client Advisers businesses, alongside Old Mutual Global Investors and discretionary fund manager Quilter Cheviot.
We also approached two support service providers, Paradigm and Simplybiz, that have a wealth management arm and in-house funds (Tatton Investment Management and the Verbatim range respectively) that are available for the advisers that pay for membership.
We excluded St James’s Place from the survey, given that their funds are run by external managers on its behalf through segregated mandates
We asked the same set of questions to ascertain what proportion of flows and existing funds came from in-house advisers. We also asked whether there were any limits on recommendations into in-house funds, what due diligence in-house advisers had to carry out, and how own-brand funds were benchmarked.
Prudential, Standard Life Aberdeen (which runs both Aberdeen Standard Investments and advice arm 1825), Aviva and Openwork (which operates the Omnis range exclusively for its advisers) all declined to comment.
Tatton declined on the basis that, because it only makes discretionary mandates available and did not manufacture its own funds, it was not comparable to other firms with in-house ranges.
Quilter was the only firm to have provided data at the time of writing. Of the £4.4bn in net client cash flowing into the Quilter multi-asset business and Quilter Cheviot in 2017, 60 per cent came via either Intrinsic’s restricted advisers or the Private Client Advisers business.
Intrinsic’s restricted advisers can pick from a panel with around 30 portfolios from third party providers, as well as Quilter’s range of multi-asset portfolio solutions.
It does not set any limits on what an individual adviser can place in its in-house funds, and Quilter’s Cirilium portfolios have achieved first quartile performance over three and five years, according to the firm.
A spokeswoman says: “Advisers make their own professional judgement as to which solution is most suitable and have the ability to choose from outside the panel to meet the customer need identified if they need to. The selection process for the panel is conducted under our investment management and investment oversight committees, who utilise third-party assessment from Morningstar, Defaqto, Moody’s and Square Mile Research.
“We do not have any minimum or maximum limits, as recommendations and individual suitability is the responsibility of the individual adviser. We annually analyse our client demographic and target market to ensure that we have the most suitable and compatible fund solutions available. We would expect our independent advisers to be searching from the whole of the market.
“For our restricted advisers we construct a panel of solutions to ensure advisers and their clients have the best possible choices available.”
The case for the defence
In theory there are obvious advantages to running two, or even three parts of the distribution chain (note that some of the firms in our sample also own platforms).
Research on in-house propositions can be thorough and well resourced, efficiencies can be generated in building and administering portfolios, as well as monitoring their progress. Information gathered about clients can be more comprehensive, with more touch-points across the group for the customer to engage with.
Amyr Rocha-Lima, chartered financial planner, Holland Hahn & Wills
It is clear that the move towards vertical integration is driven by a desire to grow revenue and maximise profits. There is nothing wrong with this, per se, but the business then faces the challenge of demonstrating whether the integrated model is providing the most appropriate outcome for the client.
This new era in the financial planning profession, which is moving away from product sales, requires businesses to adopt a fiduciary standard. A challenge for vertically integrated firms is to ensure that they aren’t encouraging the recommendation of internal products over third-party solutions as a result of their remuneration structures. If the advice provided is restricted, it must be labelled accordingly.
Vertically integrated firms often argue that their client journeys are simpler to navigate, and they can pass efficiencies on to the client in the form of reduced advice charges.
In an FCA survey in 2016, 13 per cent of advice firms expected further vertical integration in the market. This is only likely to have increased since then, with 1825 and Private Client Advisers both acquiring more firms, Prudential Financial Planning targeting significantly higher adviser numbers, and Sanlam acquiring Tavistock’s advice network.
Aurea Financial Planning managing director Rebecca Taylor says: “My instinct about vertical integration is that it’s not the model for everybody. On the face of it, we would all want something bespoke and personalised. But practically, in the real world, if you can get more people served through a vertically integrated model, that’s got to be a good thing.
“When you’ve a business the size of ours, you can control everything, everyone is singing from the same sheet and all our clients get the same service. As soon as you scale that up you need more controls in place. At the top end of the scale, vertical integration probably is a better thing for the client.”
However, the FCA’s discussion of value for money in recent work such as its asset management market study and platform market study has made it clear that the regulator is concerned with value across the entire distribution chain. It is keen to assess the role each individual element plays in delivering for customers and the nature of the relationship between them.
If you can’t get information on the process, is that just bad management or are they hiding stuff?
The regulator’s review of advice suitability last year showed that the vast majority of recommendations were in fact suitable. However, in other work, such as in its reviews of the consolidator market and platform due diligence, it has reminded advisers that shoe-horning clients into particular services because they can generate a greater margin could lead to inappropriate advice.
Former watchdog the FSA released two guidance notes in the run-up to the RDR around what it called “distributor influenced funds” – where funds are created specifically for advice businesses – and centralised investment propositions.
It outlined key concerns, including making sure conflicts of interest are managed effectively, showing suitability is matched to each client, and ensuring the impact of charges is disclosed to clients.
The regulator said: “Distributor-influenced funds can create conflicts of interest (between your firm and your advisers or your advisers and their clients) that you need to manage appropriately. For example, a firm’s desire to make an administrative cost saving or to increase the firm’s acquisition value should not lead to customers being recommended a distributor-influenced fund when this will not be in their interests.”
Product governance and disclosure rules under Mifid II introduced this year may make these areas all the more problematic for vertically integrated firms.
An adviser with knowledge of a number of vertically integrated propositions says that, if firms decided to release the data, it would likely show that recommendations to internal funds outweigh external ones.
They say: “With any integrated firm there is going to be a bias – under Mifid II, all of this has to be disclosed. How are they disclosing it now? The overall cost of the funds can be similar, but the underlying costs can vary enormously.”
Taylor says: “The big issue is you can’t actually see what’s going on. The propositions need to be good for a lot of people – not the best – but competitive, and it needs to pass on the efficiencies. If you can’t get information on the process going on, is that just bad management? Is it that they can’t be bothered? Or are they hiding stuff?”
Xentum financial planner Adam Carolan says that while it is the FCA’s responsibility to look into these structures to see if clients are getting the right outcomes, investors are bullish on the long-term commercial prospects for vertical integration.
He says: “It’s fairly obvious that the market perceives vertical integration as more valuable than not. I’ve not been inside these kind of companies so I wouldn’t know about the incentives, but as a business owner looking at it, the market is paying higher multiples for vertically integrated firms. Whether that’s a good or bad thing, I’m not sure.”
Avoid conflicts of interest if you want to pass the suitability test
The guidance and regulation doesn’t seem to be very specific on any limits where the regulator is going to get curious over your in-house funds.
It doesn’t really matter if you are restricted or independent though, you have still got to go through the due diligence, and everything has to be suitable for the client.
If your advisers have their own funds or discretionary manger to choose from, they should be considered in light of everything else that’s available.
Those phrases like shoe-horning have got to come into the equation. It’s often replacement business; firms that are vertically integrated may try to move clients into their own funds or solutions. Is there enough due diligence being done to suggest, in many cases, that what the client already has is absolutely fine, so there is no justification for changing it?
It’s difficult to see how there wouldn’t be a conflict of interest. Are advisers remunerated better for recommending into in-house things? They shouldn’t be.
Management of what your advisers are doing and where they are investing should be fairly easy. You should be running management information on the home propositions versus others, but also where recommendations are not made because there was no suitable option. File reviews before final recommendations and the results of those can tell you what providers you are placing business with.
It may be there are clients you are really targeting with the home funds. The funds given to them may be high, but not 100 per cent.
Fraser Donaldson is investment insight analyst at Defaqto