Platforum: Piecing together the vertical integration puzzle


Vertical integration, a term much bandied about, is a devil’s child to some and a saving grace to others. It is the merging together of two or more businesses that are up or downstream from each other, in that they are further or closer to the end customer. Old Mutual Wealth customer director Carlton Hood made an excellent case for it in Fundweb sister publication Money Marketing recently, although he prefers the term “both/and”.

“We want to be the best provider we can be in the advice network, asset management and platform markets. We have to excel separately but we’d also like those pieces to fit together as a whole ranked as the sum of all its parts,” he said.

Others, however, disagree. For example, director of Adviser Home Brendan Llewellyn does not believe 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, 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, 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 that 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.

Platforum 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 the use of model portfolios and found a similar result.

We all knew that a vertical integration (or “both/and”) strategy would pay dividends – supporting the low margin platform business with other higher margin activiites. And bringing together various pieces of the puzzle perhaps makes life easier for the adviser.

But vertical integration is not the only way to win at this game. Transact, a decidedly independent player, grew 7.8 per cent for the quarter, a rate that is only a hair’s breadth below average for the market. Considering that Transact does not 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 centre 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 benefited from the pension changes in their Q1 results.

In our next Adviser Guide (out in August), we will be taking a closer look at the aftermath of pension freedoms day. We will be fielding our quarterly survey in the next couple of weeks and would welcome your take on how the pension reforms are changing your business.

Heather Hopkins is research director at Platforum.