“The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun,” said Solomon, albeit probably not exactly like that. Ecclesiastes is a funny source for a chapter on vertical integration, but we think it couldn’t be more relevant.
If there is one theme that causes more furrowed brows and crossness than any other in our sector, it’s the reintegration of smaller advice businesses into bigger entities. The centrifugal force of the RDR, which killed off the network deals and sent more and more firms out into the world by themselves, has met its centripetal counterpart in the seemingly limitless appetite of the integrators and consolidators to create the next St James’s Place.
So why might we care, and why might we think this is a sector that needs fixing? Surely VI can work well for clients if it’s done right?
The answer is that, yes, of course it can be done well, and can work brilliantly where that is the case. We could argue that SJP is a case in point – if it weren’t for the ‘lobster pot’ approach and the price. We could argue that integrated and focused propositions like True Potential and Parmenion do work very well – the technology, the investment and the process all go hand in hand and it’s a good experience.
But it isn’t being done right, or at least not often enough. The sector is recreating the network model, without the marketing packages, but with the pressures to use on-panel propositions, home bias, and costs that really should be lower if the benefits of VI were flowing through to the end client.
Home bias
Mifid II is quite clear that where an adviser holds herself out as independent, then “the investment firm must, in good time before it provides investment advice, inform the client…whether the advice is based on a broad or on a more restricted analysis of different types of financial instruments and, in particular, whether the range is limited to financial instruments issued or provided by entities having close links with the investment firm or any other legal or economic relationships, such as contractual relationships, so close as to pose a risk of impairing the independent basis of the advice provided.”
That is to say, home bias is fine if everyone knows what’s going on. This is one of those areas where both advisers and providers in the VI space assume clients will engage with what’s in their portfolio, or where it’s being held and then it’s fine.
In fact, given that 29 per cent of clients in the FCA’s own work don’t even know platform charges exist, that’s a bit of a soft approach.
Advisers routinely bemoan how hard it is to transfer business between platforms. But these concerns seem not to apply when a firm is acquired by a consolidator – or has a deferred consideration to think about. Money suddenly starts flying around at alarming speeds.
One platform honcho told me that within just a few months of a larger firm being acquired by a vertically integrated advice business (we can’t name names), an amount getting on for nine figures had moved. That’s motivation. But it’s also where regulation meets economic reality, and oftentimes that isn’t pretty.
Does it all come back to fees?
Price and suitability are not the same thing; something cheap and unsuitable is still unsuitable. But a suitable proposition being replaced with another one, no more suitable and at a higher price because of the new ownership structure of a firm, is a very rum thing indeed.
There are six main areas of charge for clients (see Box 1). Of these, four are typically in line with the wider market in vertically integrated firms. For example, we find the average on-platform, ongoing adviser charge to be in the region of 0.8 per cent; that’s not hugely far away from most of the vertically integrated shops.
Platforms and products aren’t that different either – some are actually very low-cost compared with what a non-aligned adviser may access. That might give us heart that VI should indeed result in lower charges.
Where we do find differences, though, is in the price of the centralised investment proposition, and in some cases its composition. As a result, it’s entirely feasible for clients of vertically integrated propositions to face 3.5 per cent initial adviser charges and ongoing fees covering advice, platform/product and centralised investment proposition of well above 2 per cent (and sometimes more than 3 per cent) a year. And yes, it’s possible for adviser clients to have a similar experience. But what we want to see is whether the fundamental tenet of VI holds true – that there is more margin to go around and so the client does better.
Your call is moderately important to us
There are two ways of looking at the vertically integrated customer journey. First, objectively, systems should speak to one another along the chain, and whoever needs to access information to service the client should be able to do so. In addition, handovers between advice and discretionary fund managers should be seamless; technology links should be fit for purpose; costs should be fair and on a downwards trajectory to reflect the benefits of increasing scale; and, above all, the client should never, ever be worse off because they are taking the VI route, be that in terms of cost, investment options or service.
The other way of looking at all this is subjectively, specifically through the eyes of the investor. How are they better off taking the VI option instead of having an independent planner put it all together? Are they better off? Is there a better service experience? Lower charges? Better investment choice?
That’s what VI should feel like: seamless, controlled and consistent, with the benefits of scale built into the costs.
Sadly, in our work we have found that no one vertically integrated provider really achieves this. Everyone is let down to some extent by one or more element across the chain.
What causes this? We think it can be traced to one overarching flaw: the disconnect between different parts of the VI chain.
There’s more than one case where passing the client from adviser to DFM works more effectively when the adviser is outside of the chain. Where this is done internally, the respective systems don’t ‘talk’ to one another.
There’s a great deal of very complicated business process behind this, but the client’s reality is that they have to call (at least) two different people within the same business to answer questions on what is, to them at least, one investment.
The same point stands for investment offerings. Carefully chosen and managed funds may be promised, but these can often be accessed by other means and at a lower cost. Where options are limited to the DFM of choice, is that always in the client’s best interests? And if so, how?
You are what you do, not what you say you’ll do
It’s hard to run advice businesses at scale – especially if you’re a provider and in danger of eating the lunch of your independent supporters. Profitability is tough – what profit there is tends to come from the investment solution side of things – and that’s reflected in FCA stats which show that yield on assets for VI platforms is only a few basis points higher than their standalone counterparts.
The universal issue is this: the need to feed the many mouths in the chain outweighs any motivation to pass on scale benefits to the client. Paying a premium for superior service is one thing, paying a premium for mediocre or substandard service is quite another.
And if clients want independent advice, and if the new breed of large firms wants to retain independence and still flow money to its most profitable solutions – that is, the in-house ones – then we are back to the same old conflicts we know so well from the pre-RDR days. Truly: nothing new under the sun.
Mark Polson is principal of the Lang Cat
