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Vertically integrated firms are direct sales forces back from the dead

by Steve Young on Jan 15, 2013 at 11:11

Vertically integrated firms are direct sales forces back from the dead

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.

6 comments so far. Why not have your say?


Jan 17, 2013 at 11:55

I would suggest that it all depends on the integration. I would agree a product provider like Standard Life would be a retro step for the client however an IFA driven VI model would seem to be the ideal for a client; costs can be controlled (up and down), an unbiased impartial whole of market full advice range proposition rather than restricted and adviser charging. What more could a client want?

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Jan 17, 2013 at 11:57

In answer to your 3 questions:

1. Yes, some will

2. Yes,some will - cos they won't know what they are paying

3. Of course the regulator will stand by - the purpose of RDR was not to create a level playing field.

Nice blog though, Steve

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Simon Field

Jan 17, 2013 at 16:35

IFA's going broke, going to jail, selling without profit plans, structured products, Arch Cru, platforms with no support, white socks n cheap suits must be the future then?

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The Rumpo Kid

Jan 17, 2013 at 18:07

Simon - white socks and cheap suits! They do bring back memories of the kind of chap who would have you ourt of your final salary pension and into one of those new-fangled personal pensions in a jiffy. Although I think the attire of choice these days is the fat, footballer's tie knot and spiky hair with plenty of 'product' applied.

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Simon Field

Jan 17, 2013 at 18:50

Kid - Enduring images...both of them. I've met both too- albit sometime ago. Nevertheless, this Direct Sales and "vertically integrated" dinasors stuff is all a bit emotional and mid-life crisis. Put more simply, it is drivel. Cant see Standard Life goinf the same way as Berry Birch & Noble etc. We all now have to operate withion the rules...until they are changed again and wishful thinking wont change anything. This author would be better off dressed in drag on Brighton pier with a glass ball. He might earn more money too!

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Jan 20, 2013 at 16:26

A model without the 'win, win, and win' eventually fails. Who? The provider/fund manager, the client.... And crucially the advice firm. Agreed the balance between the three is open to debate, but some advisers seem to think profitability is sinful

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