Vertical integration has its drawbacks

Hosted by chef and pub owner Tom Kerridge, it was filmed in the early part of this year, so takes an unexpected turn when the first national lockdown arrives.

But one of the most revealing features of it is the relationship between some landlords and the ultimate owners of their properties, the tied pubs.

These landlords are locked into paying rent to a big chain and agreeing to sell beer supplied from that chain and pay its wholesale prices.

One couple from the West Country, who have no shortage of customers, find themselves forced to hike their prices to ludicrous levels just to make ends meet (their profit for one year was just £3,000).

The upshot was that they ended up having to run their business in a way they did not want, because they were obliged to report to the pub company.

This reminded me of what I hear so often from people who have not enjoyed working for vertically integrated advice companies – the advisers are like landlords tied to a pub company.

I have always said that independent financial advice is the gold standard of the industry

In many respects, working for one of these businesses helps a great deal. 

You get the benefit of mass branding, you have IT, compliance and lots of investment tools and expertise at your disposal.

It can also mean feeling part of a bigger team, with a corporate structure built around you that provides support.

But with this comes a responsibility to behave in a certain manner that is set by someone who may not understand the type of business you want to run. And the support, when it does come, is often in a limited way – typically focussed on revenue generation.

In some cases this means being forced to sell products you may not necessarily think are the best; being asked to hit sales targets and profitability levels that you may not approve of; and being constantly under pressure to change your business methods if they do not seem to be working.

Most recently I heard from one adviser who fell out with a company because he did not want to sell products to his friends and family, which he claimed was the modus operandi of all new recruits in this company.

Another adviser who had left a different company told me of the pressures to churn products all the time in order to justify advice fees.

I have always said that independent financial advice is the gold standard of the industry – and financial advisers I speak to regularly going it alone, or who are part of small businesses, are extraordinarily proud of what they achieve.

Their morality and philosophy is at the heart of the business, not those of a bigger company behind them.

But given the ever-growing challenges of running a business on your own, and the almost insurmountable cost pressure of professional indemnity cover, it is inevitable that more consolidation and the attractions of becoming part a vertically integrated company grow by the day.

There were two important lessons I took from the pub programme.

The first was that Mr Kerridge himself ran his Michelin-starred business through a tied pub company – and he became so successful that he seemed to be able to operate on his own terms.

And secondly, that quality wins the day. The landlords of the West Country pub hiked their beer prices, but customers kept coming back because they loved the pub, the service and the landlords.

I will raise a glass to that.

Tax talks

It must be almost Budget time because we are talking about scrapping higher rate pensions tax relief again.

It didn’t happen at the spending review last week and it is not going to happen in the future either. Not because it is unfair, and not because the Tories will lose voters, but because the current system is impossible to untangle.

Pension tax relief is an employers’ tax break – almost two-thirds of the relief comes from companies – and largely affects defined benefit schemes.

Given that pensions tax relief is prevalent in the public sector, scrapping higher relief would leave an almighty black hole that taxpayers would be expected to fund.

And that really would be a vote-loser.

Pension freedoms

Do you remember when it was a problem that 60 per cent of people took a retirement income with their existing provider? That was why we had the pension freedoms.

Today, 59 per cent of people taking a drawdown product take one with their existing provider and 57 per cent of those with an annuity. What?

So much for the principles of shopping around. 

Time to get back to the drawing board.

James Coney is money editor of The Times and The Sunday Times