Vertical integration is a term that has its roots in the industrial age, with Carnegie Steel often held up as one of the earliest examples. Carnegie controlled not only the mills where it made steel, but the mines from which ore and coal were extracted, and the ships and the railroads that transported raw materials and finish- ed product.
At its simplest, vertical integration describes a business where the key elements of the production process are provided by a single company. Within industry, one of the key attractions of this model is its ability to reduce costs, particularly of materials when manufacturing a physical product.
Vertical integration offers a joined-up approach to managing wealth. It begins with the adviser relationship – someone who understands all aspects of what a client needs, while also offering them the accountability of one business overseeing their investment journey from advice, right through to the savings product they invest in.
Netflix model
It is a model customers will be familiar with. Across numerous industries, there are examples of success through vertical integration. Take Netflix, the TV and film streaming provider, which is now valued at more than $30bn. It started life distributing DVDs in the early 2000s but has grown rapidly since moving into online streaming distribution, while also commissioning its own Netflix Original content.
Similarly supermarkets now combine the distribution of third-party products from a variety of brands, while manufacturing their own products, too.
Importantly, these models give customers the choice to create their own proposition, taking products and services from a single provider where they choose, but incorporating others from third-party providers where it is right for them. Vertical integration allows customers to create the proposition they want, while benefiting from the simplicity and efficiency of sourcing everything through a single platform.
In the wealth management industry, vertical integration of old has suffered from scepticism where it appears to support sub-standard components.
For the model to be successful, it is imperative each constituent part excels as a standalone service and we take this point extremely seriously.
A modern approach to vertical integration is one that offers clients an efficient com- bination of services that also stand up to scrutiny in their own right.
For modern vertical integration to be successful, each constituent part must be competitive against its peers in a ‘horizontal’ model as a standalone service.
That is why our asset and investment management businesses, Old Mutual Global Investors (OMGI) and Quilter Cheviot, stand on their own two feet against their peers. We then look at how we can integrate that expertise to create something exceptional.
The combined OMGI and Quilter Cheviot multi-asset function is one of the most experienced in the market today, and that is the team managing WealthSelect and our revamped Generation funds on our platforms.
We believe that face-to-face advice is still the single most effective way for people to make the most of their money.
Old Mutual Wealth’s aim has always been to help sustain and support quality advice and the addition of Intrinsic in 2014 gave the business an intimate understanding of adviser firms and their clients.
Benefit sharing
Like our other component parts, Intrinsic cannot exist only as a distribution function supported by the rest of the value chain. It must be credible in its own right. Intrinsic retains independent, restricted and mortgage and protection businesses for those advisers and clients for whom a fully vertically integrated proposition is not the right fit.
For some advisers and their clients, those components of financial planning, administration and product solution will remain separate. But where we can connect those component parts to offer value, simplicity and reassurance for advised clients, it can only be a good thing, giving clients and advisers the opportunity to share in the benefits of vertical integration.
…while Rathbones steers clear of vertical integration, believing conflicts of interest have not been entirely eradicated
Mike Webb group executive committee member, Rathbone Brothers
History serves as a stark reminder of the tough lessons that the financial services sector has had to learn as a result of vertical integration. However, revisiting the past also provides some valuable insight into just how much the industry has changed since those days.
During the ’80s and ’90s, representative networks were largely bought by life companies that considered financial advisers purely as a means to gathering assets. The difficulty was that many advice businesses did not want the parent company to influence the products and services they offered to clients, and a clash of cultures ensued.
Parental influence
Fast forward to today and vertical integration is still viewed in this light. However, there is a key difference between now and then: the fiduciary responsibility of the adviser. Whether an appointed representative of a large life company or an independent adviser, this responsibility was not fully understood before.
One of the positives of the Retail Distribution Review is that it introduced absolute clarity around the adviser’s fiduciary role. Now, more so than ever, an adviser would be unwilling to continue to operate within a business model where reduced optionality meant these duties and, ultimately, the service to their customer could be threatened.
Crucially, for parent companies, this change also allows clear foresight and better management of any potential conflicts of interest.
However, putting vertical integration into practice in today’s market is not without its challenges. The potential for conflicts of interest has not been entirely eradicated.
