“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.
