Vertical integration is not all it's cracked up to be

Fund managers are rushing to provide financial advice and financial advisers are rushing to be investment managers.

Just a few recent examples of this trend are Sanlam’s announcement that they are combining their financial planning and investment management arms; St James's Place's acquisition of Rowan Dartington; BestInvest Tilney’s purchase of Towry and Tavistock’s creation of their own fund management arm. This list is by no means exhaustive but just a sample of a growing trend.

One might question why this has happened? Well, I don’t think anyone can claim it was borne out of an altruistic desire to provide a better service to the end investor.

Instead one might cynically conclude that the industry has conceived a way to offset the squeeze in margins that has taken place across both the financial advice and investment management industries post RDR and which is in all likelihood set to continue with the implementation of Mifid II in 2018.  

The losers in this case will be the shareholders of the acquiring companies if and when the FCA does more than raise its concerns.

Effectively, firms want to increase their share of a shrinking retail fee pie by internalising either the fund management or financial advice revenue that has been historically outsourced.

One can argue that this is yet another example of regulation producing unintended and unforeseen consequences that to some extent outweigh the intended benefits. 

The FCA has only recently highlighted its concerns about this trend to vertical integration, stating: "Adviser networks have a commercial interest in promoting their own funds because the network generates revenue from the investors that choose the in-house fund or portfolio."

It went on to say: "While we have not found any examples of adviser networks mandating the use of in house funds, we have been told the flow of money into in house funds is growing".

Does this all seem somehow reminiscent of the great bank assurance debacle where the banking industry decided the best way to increase returns - in the face of a squeeze in margins in their core business - was to sell more services and products to their clients?

Some 15 years later, and at a cost of £39bn, it does not seem such a good idea as at the time.

Although the circumstances are different and the sums involved are smaller one can see there are many parallels. The losers in this case will be the shareholders of the acquiring companies if and when the FCA does more than raise its concerns.

However, given the groundswell shift to vertical integration that has taken place, I imagine any move to reverse this trend or curtail it will be strongly opposed in many quarters.

Nevertheless, there is a fundamental conflict of interest if supposedly ‘independent advisers’ are encouraged to recommend a predominately in-house solution.

What happens when the investment returns of the in-house solution are very poor? Do you think an adviser would be able to recommend an external solution?

This is an extreme situation and in many instances this will not be the case, but to continue to permit this to occur will undoubtedly reduce both consumer choice and competition.

Alan Beaney is Chief Executive at RC Brown Investment Management