In this exclusive analysis for IFA Magazine, David Ogden(pictured), Head of Compliance at Sparrows Capital, shares his insight and raises interesting questions into the growing trend for vertical integration of advice firms as he touches on some of the possible areas where conflicts of interest can arise.
Vertical integration in the advice sector has been a gathering force over the last decade with the Retail Distribution Review (RDR) perhaps the original catalyst. This momentum has been fuelled by several key players as well as the wave of private equity-led consolidation.
It is easy to see the attraction. Share of wallet, an expression that implies entitlement to profit as opposed to a focus on client outcomes, is surely the number one objective for vertically integrated firms. Keeping everything in-house maximises revenue and data acquisition and control. Why would a group with its own investment offering want its advisers to send clients, and their wallets, elsewhere?
But isn’t that an inherent conflict of interest in firms which maintain claims to independence? While all businesses have conflicts of interest, some are more manageable than others; this is not a debate that can be put into the straightforward category.
The definition of independent is vague, but it is important and hard to achieve. I think it is well established that some claims of independence in the advice sector are, overstated.
Platforms
But what of the other key players in the distribution chain serving retail investors – the platforms.
Whether direct to investor or via advisers, platforms are critical to the distribution process and exert strong influence over the availability of products and services. Investment firms, particularly new entrants, will be all too familiar with the hurdles of making their proposition available across platforms.
Evidencing future demand for an innovative new offering is an impossible task. Indications of interest are all well and good, but unless substantial and immediate uptake is assured then the gate remains firmly shut.
Discretionary fund managers (DFMs) like Sparrows Capital are used to such resistance in relation to new portfolios and also service innovations, such as our capped-fee pricing proposition. System enhancements always bring complexity and risk, but often the push-back seems inconsistent with the best interest of the underlying client.
Conflict policies
So, are other factors at work? Do the conflicts of interest that affect advisers and fund managers also apply to platforms where there is common ownership?
It clearly cannot be in the group’s overall interests to provide existing and potential clients with access to a service that competes with an in-house offering, especially if that new service offers better value.
For many years, regulated firms have been required to adopt and publish conflicts policies. These focus almost exclusively on direct conflicts between the firm and its clients (or between clients).
But, since the Financial Conduct Authority (FCA)’s definition of a client includes a potential client, do those policies go far enough? Should they look explicitly at whether conflicts are impeding access to third-party services that suitable for target markets?
One of the regulator’s statutory objectives is to promote competition. I contend that this almost invisible barrier is hampering competition and stifling innovation which would deliver better client outcomes.
This is difficult territory. Businesses operate with a view to generating profits, and certainly the regulator has never suggested that this should not be the case. Consumer Duty requires firms to focus on the interests of their clients. Where should that balance lie in the circumstances described here?
Perhaps it is the case that only new and independent entrants to the platform market are in a position to really deliver unfettered distribution. But ironically, their independence has nothing to do with the FCA’s defined term.
