This week, Heather Hopkins (@heatherahopkins), Research Director at The Platforum, discusses vertical integration in the adviser platform market.
In our most recent Adviser Guide, we explore the issue of vertical integration, a term much bandied about. Vertical integration is the merging together of two or more businesses that are downstream or upstream from each other, in that they are further or closer to the end customer. Carlton Hood of Old Mutual has made an excellent case for vertical integration (though he prefers the term “both/and”). Others with longer memories, like Brendan Llewellyn disagree (in part because he doesn’t believe that all the links in the chain can be equally strong).
We prefer to think of the various pieces of the investment advice value chain as a puzzle. In our recent Adviser Guide, we published a simple graphic to show the various parts of the puzzle. Different firms offer different pieces of the puzzle with Standard Life and Old Mutual joining up most pieces. Offering various pieces of the value chain can make business sense.
In the 1980s and 1990s the life insurance companies’ direct sales forces thrived and then died under the weight of falling margins, rising compliance and training costs and a succession of misselling scandals. More recently, some have been spectacularly profitable – notably St James’s Place. But others have foundered – for example Friends Life’s ownership of the large adviser network; Sesame.
Whatever you think of vertical integration, it is not easy to pull off. The idea of buying a platform which you then use to flog your funds sounds great. But the reality of trying to get the system, pricing and all the other tricky ducks in a row is a different matter.
Our analysis of the products advisers use shows a strong relationship between platform use and choice of multi-manager fund. Advisers are roughly twice as likely to use a platform’s multi-manager fund if they also use the platform. We ran a similiar analysis of use of model portfolios and found a similar result.
But we all knew that a vertical integration (or “both/or”) strategy would pay dividends – supporting the low margin platform business with other higher margin activiites. And bringing together various pieces of the puzzle perhaps to make life easier for the adviser. But vertical integration isn’t the only way to win at this game. Transact, a decidedly independent player, grew 7.8% for the quarter, a rate that is only a hair’s breadth below average for the market. (And considering that Transact doesn’t have off- platform assets to convert this is a pretty healthy growth rate.)
Vertical integration is an interesting debate but pensions are more front and center for financial advisers. We are already seeing a shift in assets to pension wrappers and expect that to continue. Aegon and James Hay in particular benefitted from the pension changes in their Q1 results. In next quarter’s Adviser Guide, we will be taking a closer look at the aftermath of pension freedoms day. We’ll be fielding our quarterly adviser survey in the next couple of weeks. Let us know if there are specific topics you’d like us to explore.