Vertical integrated firms are a great example of how modern businesses find a novel way to describe a discredited concept. Like bringing back the dinosaurs in Jurassic Park, we will all pay the price for this unnatural resurrection.
Once it was called a direct sales force, tied to the products of one product manufacturer. But most of the direct sales forces were killed off, by a combination of expensive products, intrusive regulation and risk averse product manufacturers.
Some firms have shown, at least in shareholder terms, how to create value from integrating product manufacture and distribution, and many of today's distribution giants are desperately grasping at the vertical integration straw.
In classical economic theory, the real value of a monopoly is that it allows you to increase your margin because of the lack of competition. Vertical integration is a way to establish a near monopoly for financial products and the new kid on the block hoping to exploit this monopoly is the so called joint venture investment company.
The theory is simple: find an investment partner, design a range of risk rated funds with 'generous' charges, add a platform if you have one, mandate these funds to all of your advisers and then you can sit back and watch your share of the profits rack up.
Do this for five years, sell your business to one of the providers queuing up to buy the right to substitute their generously priced funds and you can head off to the beach.
From my perspective, the success of these ventures depends upon three main factors:
- Whether advisers are prepared to be 'dumbed down' to the point that they are simply salesmen.
- Whether customers will be happy to pay for expensive investment solutions when there are many cheaper and more suitable solutions available from independent advisers.
- Whether the regulator will stand by and accept these attempts to sidestep adviser charging rules or grasp the nettle of addressing the consumer detriment which is created by these joint ventures.
Dinosaur direct sales force became extinct because they failed to adapt. They were out competed by a better design, the IFA.
2013 will see the resurrection of these old dinosaurs; this time with shiny new technology and cloaked with the faux credibility of an 'adviser title.
Should this dinosaur be resurrected? We have the technology, but it will only end in disaster.