Very large firms that are offering services at different stages of the value chain will naturally fall subject to various parts of the regulatory regime. This, in turn, creates a tendency for the parent company to control businesses along the chain in order to reduce risk, allowing the potential for conflicts of interest and cultural divides to creep in.
Domino effect
With many entrepreneurial businesses in the advice or discretionary fund management chain, this would require careful communication to manage any perception that their business could be interfered with.
The expense of vertical integration poses another potential stumbling block. Preserving good governance and IT systems is crucial to increasing efficiencies down the value chain, but they can prove extremely complex and costly to maintain, particularly if it involves a large network of advisers.
Indeed, the prospect of this expense, coupled with the complexity of managing regulation across the value chain, is what prompts many firms to opt for focused horizontal models over vertical integration.
Whether one chooses to focus on how the industry has improved or its ongoing pitfalls, a broad look across the UK financial services industry indicates that vertical integration is here to stay. On closer inspection, however, the reasons why and how different companies embark on vertical integration are quite distinct.
There is a real difference when a business that already covers investment management, platforms, advice and discretionary management develops vertical integration compared with Rathbones’ own recent acquisition of Vision Independent Financial Planning, for example.
We were all too aware that our business did not inhabit all of these pockets on the value chain, but then it has never been our ambition to develop a conglomerate of financial services offerings.
Instead, Vision provided a unique opportunity to strengthen our distribution in the financial adviser market, as part of our asset-gathering strategy, and was very much a one-off acquisition. It is also a very different type of business in that it is fast-growing but a relatively small network compared with larger advice firms.
Chain reaction
Its culture is independent and we were careful to ensure that we could strengthen rather than threaten this ethos.
We are putting this into action by appointing a non-executive chair and an independent adviser to its Castle Investment Solutions business, which carries out due diligence on discretionary managers.
Vision, as an independent adviser business, would also expect us to continue delivering the highest quality service, something we had to be extremely confident of when going into the deal. We were also very aware we will compete against other members of the panel, and failure to deliver on our part would be a risk. However, we are an investment management business and this is a risk we are happy to take.
What is clear is that there is definitely more than one way to skin the vertical integration cat. The fact that the concept has come a long way from its somewhat tarnished past has made it a more logical move – at least for those players with particularly deep pockets.
