In the medieval period, alchemists sought the secret of turning lead or iron into gold. All attempts failed or were deliberate frauds.
In the 20th century scientists discovered how to split the atom and now attempts are being made to replace our expensive and destructive reliance on fossil fuels with the almost free and endless power theoretically available from nuclear fusion.
Unfortunately, no-one has credibly been able to deliver this Holy Grail either.
Financial services now has its own version of alchemy: vertically integrated advice firms.
How the model works
Vertical integration works by streamlining client acquisition, advice, asset allocation, product and wrapper choices and funds so the client journey is smooth and there is limited frictional cost between the stages. Clients should therefore receive clearer advice, there should be proper accountability and the overall cost should be lower.
These client benefits should generate great client feedback, which feeds into marketing, which grows the firm, generating scale, which should reduce costs even further. How brilliant.
If products are really just tax wrappers, and funds always revert to the mean in terms of performance, it should all work out in the client’s favour, right?
Unfortunately, it does not always work that way, not for clients at least.
Wilful misinterpretation
The savings made through vertical integration are usually used to generate shareholder profits, and support impressive marketing campaigns and costly recruitment and expansion programmes.
Typically the model has a loss-making advice front end, and a highly profitable manufacturing core business at its heart. The advice part is usually a simple distribution model and is generally cross-subsidised to a greater or lesser extent. While often against the spirit of regulation, regulators have been slow to enforce the rules against these larger firms.
In the UK, these firms should clearly be branded as restricted. However, there has been a reluctance to label firms in this way, with a certain amount of fudging going on. Firms have been known to describe their advice offering as best of breed, specialist or as ‘through carefully selected partners’, rather than saying they only sell their our own (expensive) products and funds.
Clearer disclosure
The ongoing Financial Conduct Authority and Treasury-led financial advice market review has prompted calls for clearer disclosure by advisers who have commercial relationships with product providers, as vertically integrated firms do.
In his role as director of policy and communications at Royal London, former pensions minister Steve Webb visited the Perceptive Planning offices to discuss how the pension changes were affecting financial planning firms and their clients.
The insurer has told the regulator it believed impartiality underpinned the integrity of advice and consumers might not be aware of the conflicts of interest within vertically integrated arrangements.
In an earlier statement, Webb said: ‘We need to make sure consumers know that the adviser they are dealing with is putting their interests first.’
Vertically integrated firms do have the potential to be a force for good.
With proper regulation, selling simple products in a cost-effective way, they should allow access to sales, if not to proper advice, for millions of consumers, which would be a good thing.
The challenge for the regulator is to facilitate this while ensuring these firms’ enthusiasm for marketing themselves is not allowed to deceive or mislead consumers into believing they are getting what they are not: proper, unbiased, independent, professional advice.
Phil Billingham is director at Perceptive Planning