Alan Beaney, chief executive of RC Brown, told FTAdviser firms that own too much of the value chain were not in the best interest of the consumer by design due to the conflict of interest the setup created.
He said: “If a fund is underperforming then typically an independent financial adviser would pull their client out of the fund.
“But if the fund manager is owned by the company you’re working for then there may be pressures or practical issues that stop that happening.”
The same went for platforms, according to Mr Beaney, as the funds available could affect the experience the client received.
He added: “There is a conflict of interest owning the whole value chain. When everything is going well, it’s not a problem. But in fund management that’s not always the case.”
Vertical integration is when a firm owns more than one part of the value chain such as the advice business and investment manager as well as the adviser platform.
One-stop-shop giants is a growing trend in the industry but is not without controversy, particularly on the topics of conflict of interest and price.
In its report into the asset management market, published in June 2017, the Financial Conduct Authority expressed concerns about the conflict of interest between the different functions at firms, and particularly cited value for money concerns.
Financial advisers have also been fierce critics, arguing those firms operate against the spirit, if not the actual wording, of the Retail Distribution Review.
A major reason for the introduction of the RDR was to sever the stranglehold of influence life companies and fund management houses had over the provision of financial advice.
One respondent to the FCA’s asset management study argued that vertical integration had increased since the RDR and that in their opinion this could be interpreted as providers seeking alternative routes to regain their influence on the retail market.
Mr Beaney thought the regulator would look again at the issues which stemmed from vertical integration in the future and that in about five years' time the industry would see a demerger of such firms.
He said: “At some point the FCA will look at it again and decide it’s not in consumer good. This vertical integration is not in the client’s best interest, it’s in the interest of the money and revenue of firms.”
Tim Morris, IFA at Russell and Co Financial Advisers, said: “Vertical integration has been on the FCA’s radar for at least a couple of years. I'm not confident it will be addressed any time soon — yet would happily be proven wrong on that.”
Mr Morris said the main benefit of vertical integration was the ability to reduce costs along the value chain, but in practice firms tended to keep a “larger slice of the pie”.
He added: “In theory, what has the potential to be better for a consumer, at least in some ways, ends up being worse in most.
“It can certainly make it more difficult to move a client, mainly because they will likely feel more of a sense of loyalty.”
This was opposed to fully independent advisers who would soon move their clients if they felt there was a detriment to them, Mr Morris added.
imogen.tew@ft.com
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