Vertical integration and the Cloak of Invisibility

So this post follows on from Professor Cunningham’s excellent post here. He’s the Adviser Lounge’s entire theoretical physics department, an area that can only grow in importance post-RDR.

Anyway, AC’s post got onto vertical integration and this is a bit of a bugbear of mine. If you muck around in marketing strategy circles – and if you don’t you should, it’s a laugh – you’ll quickly start seeing value chain diagrams. These are the ones with lots of Powerpoint chevrons, going from left to right, each denoting someone who does stuff and charges money for it. The 23-year old MBA geniuses who run these sessions (£2,900 a day from any good Big 4 consultancy, bish bosh, we’re in the wrong game lads) will quickly point out that the more chevrons you inhabit, yeah, the more revenue you keep, yeah, and the more synergies (good consulting word) you get, yeah, so, like, if you totally camp on lots of the chevrons then you can snaffle lots of bunce and some kind of heaven will result and can I have my fee now?

The trouble is, that’s hardly ever true. And in our market, it’s hard to think of any part that carries it off. Do I want my platform to manufacture investments? Hell no. Do I want my financial planner to have their own platform that they’ve developed? Hell no. Do I want my back office system to be a custodian? Hell no. Do I want my planner to be my investment manager? Hell no (that last one gets me in trouble sometimes).

The point is that we should all fear vertical integration. Wherever you see it, something’s up. The bundling together of services – whether from provider or adviser side – is a Potter-style Cloak of Invisibility behind which all kinds of stuff can be happening. It’s at the hidden margins where money is made. It’s at the hidden margins where clients lose out. We should have no part of it. Each part of the chain (yeah) needs to feel the white heat of the gaze of a true expert trying to work out if it adds value to the client. That expert is called a financial planner, I think. I’m pretty sure it isn’t a bank’s proposition team, who’re charged with maximising revenue lines over and above the straight (adviser) fees.

Interestingly, fans of the spotty wizard may know (I found it here)that another way of creating invisibility is by using the Disillusionment charm. Disillusionment is a good word, and in Polson’s RDR dictionary (3rd ed) its definition is “propositions from which the advice-giver or any associated company receives a direct or indirect financial benefit if they recommend it.”

DIFs, big advice restricted panels, DFM kickbacks – all the same thing as the vertical integration from the banks. If we’re about rebuilding trust then let’s shine a light onto all this crap and see if we can’t send the little critters scuttling for the shadows.

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12 thoughts on “Vertical integration and the Cloak of Invisibility

  • The question we should ask more often is “Who’s the fidicary here?” Who is really looking after the client’s interests? And who does the client think is doing that? If you aren’t assuming any real fiduciary responsibility (and that’s virtually everyone) that should be clear. The feigned paternalism of many, causes more confusion than indepependent/restricted definitions will. Plenty of evidence of that in product and fund marketing literature, not just the vertically integrated.

    Reply
  • Wonderful post Mark and one I agree with wholeheartedly.
    The vertically integrated would argue that as long as they disclose all charges then whats the problem? However, as you say it’s the backhanders and the hidden margins that are often not disclosed.

    Reply
  • Not sure vertical integration can be discounted out of hand or “feared”. Poorly executed vertical integration leads to many of the issues you raise in your article however where it is delivered well then it can lead to benefits for ALL stakeholders.

    The problem with many of these arrangement is that they are artifical and not really vertically intergrated businesses. Fund management companies established with no fund management expertise or staff is an obvious example. Synthetic arrangements deisgned solely to extract profit is different to building/acquiring capability in order to retain more of the profit.

    Without wanting to go all MBA as you put it, most distributors in any industry want to get as close to manufacturing as possible. Its not just about profit either – control, product development, risk mitigation.

    Reply
  • I am with Anthony Morrow – I don’t think you should dismiss vertical integration (or any other form of integration) quite so out of hand. Like any strategy it can be powerful when used correctly, but disastrous when not.

    Apple recently forward integrated its retail outlets with great success.

    That being said, specialisation, one of the driving forces of industrialisation, makes the case for integration harder as time goes by. After all, there was a time when we used to grow, prepare and eat our own food – and I can’t see us returning to that economy very soon.

    On the other hand specialism and dis-integration (if that is the opposite of integration) is not without its problems. In particular it causes misalignment of interests – one of the drivers of that pesky little RDR.

    I am not promoting integration in our sector, but at the same time I would not dismiss it simply because we lack the imagination right now to find a suitable case for it.

    Reply
  • Great blog – completely agree the vertical model is usually not in the client’s interest

    One caveat being that this industry lacks ‘share of voice’ in the marketing airwaves. While that final chevron (advisers) remains so fragmented, no-one has the marketing clout to really get out there and educate consumers about the benefits of advice. The exception being MAS….but their lack of profit motive creates as many challenges as the conflicted interests inherent in the vertical model

    That said, as a former 23 yr old MBA, what do I know…!

    Reply
  • “Do I want my planner to be my investment manager? Hell no” – Ab. So. Lutely. I reckon most of the ills in our industry/profession are due to providers and advisers getting involved in stuff they know nothing about. NatWest endowment anyone?

    Great post Mark – with you 100%

    Reply
  • Great blog – completely agree the vertical model is usually not in the client’s interest

    One caveat being that this industry lacks ‘share of voice’ in the marketing airwaves. While that final chevron (advisers) remains so fragmented, no-one has the marketing clout to really get out there and educate consumers about the benefits of advice. The exception being MAS….but their lack of profit motive creates as many challenges as the conflicted interests inherent in the vertical model

    That said, as a former 23 yr old MBA, what do I know…!

    Reply
  • “Do I want my planner to be my investment manager? Hell no” – Ab. So. Lutely. I reckon most of the ills in our industry/profession are due to providers and advisers getting involved in stuff they know nothing about. NatWest endowment anyone?

    Great post Mark – with you 100%

    Reply
  • I am with Anthony Morrow – I don’t think you should dismiss vertical integration (or any other form of integration) quite so out of hand. Like any strategy it can be powerful when used correctly, but disastrous when not.

    Apple recently forward integrated its retail outlets with great success.

    That being said, specialisation, one of the driving forces of industrialisation, makes the case for integration harder as time goes by. After all, there was a time when we used to grow, prepare and eat our own food – and I can’t see us returning to that economy very soon.

    On the other hand specialism and dis-integration (if that is the opposite of integration) is not without its problems. In particular it causes misalignment of interests – one of the drivers of that pesky little RDR.

    I am not promoting integration in our sector, but at the same time I would not dismiss it simply because we lack the imagination right now to find a suitable case for it.

    Reply
  • Wonderful post Mark and one I agree with wholeheartedly.
    The vertically integrated would argue that as long as they disclose all charges then whats the problem? However, as you say it’s the backhanders and the hidden margins that are often not disclosed.

    Reply
  • The question we should ask more often is “Who’s the fidicary here?” Who is really looking after the client’s interests? And who does the client think is doing that? If you aren’t assuming any real fiduciary responsibility (and that’s virtually everyone) that should be clear. The feigned paternalism of many, causes more confusion than indepependent/restricted definitions will. Plenty of evidence of that in product and fund marketing literature, not just the vertically integrated.

    Reply
  • Not sure vertical integration can be discounted out of hand or “feared”. Poorly executed vertical integration leads to many of the issues you raise in your article however where it is delivered well then it can lead to benefits for ALL stakeholders.

    The problem with many of these arrangement is that they are artifical and not really vertically intergrated businesses. Fund management companies established with no fund management expertise or staff is an obvious example. Synthetic arrangements deisgned solely to extract profit is different to building/acquiring capability in order to retain more of the profit.

    Without wanting to go all MBA as you put it, most distributors in any industry want to get as close to manufacturing as possible. Its not just about profit either – control, product development, risk mitigation.

    Reply

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