Over the past few years, a growing number of firms have moved towards offering financial planning and investment management together.
These companies argue that integrating the two services allows the client’s investments to be managed completely in line with their financial goals. It means the financial planner and investment manager are singing from the same hymn sheet.
The sceptics out there suggest that integration has also been driven by a desire to diversify business models in order to win a larger share of the ‘client’s wallet’, particularly in an environment where fees are coming under pressure.
Alan Beaney, an investment director at RC Brown Investment Management, believes the trend towards integrating advice and investment management is an unintended consequence of reforms that came into force in January 2013.
These rules, known as the Retail Distribution Review (RDR), sought to improve free transparency and professionalism by banning advisers and wealth managers from taking commissions from the products they recommend. Instead, they must now charge a fee direct to the customer for the advice provided.
“The move to vertical integration was one of the unforeseen consequences of the RDR. It effectively squeezed margins, so the industry decided the best way to increase margins was to get more of the pie,” Beaney explained.
Which is the Best Path to Take?
If you are looking to appoint a financial adviser and an investment manager, there are a number of paths you can take. Firstly, you can do your own research and appoint them separately. Secondly, use a financial adviser who outsources to an external investment manager. Finally, opt for a firm that does both. Which is the best path to take?
Beaney suggests that a financial adviser who works in a business that also manages the investments faces a challenge if investment performance is poor. If a financial adviser chooses to outsource to a separate investment firm, Beaney anticipates they will be quicker to act if performance disappoints.
“If a financial adviser employs a fund manager and they do not do a good job, they can sack them and employ a new one. So effectively [with an integrated model] you are taking away an independent view,” the investment director explained.
“You have got this conflict of interest because you are going to encourage your clients to use your own fund managers whether they are any good or not – because financially it is in your best interests. There is a big incentive to use your own fund managers,” he added.
The potential conflicts of interest within integrated firms appears to be on the Financial Conduct Authority’s (FCA) radar. Back in April, the regulator used its mission statement to express concerns that unsuitable advice can be provided when conflicts of interest are not managed properly or recognised.
So-called ‘vertically integrated firms’ which offer financial planning, investment management alongside underlying funds are high on the City watchdog’s agenda.
Drifting Away from Objectives
However, financial advisers who appoint an external investment manager to look after their clients’ portfolios can also face challenges.
Lee Robertson, chief executive of wealth management business Investment Quorum, has encountered problems with external investment managers in the past.
“If financial planning and investment management are in the same place, they will probably be much better aligned and integrated. We used to outsource quite a lot of investment management, but typically found it was too easy for the investment management function to get off mandate or to drift from risk tolerances or actual objectives for income,” he explained.
His firm offers both investment management and financial planning in-house, and occasionally outsources. In his opinion, the investment performance of an integrated firm must be commensurate or better than an external investment manager.
“Is the discretionary fund management function within a vertically integrated business as good as one you could get outside? Do the discretionary managers work as hard as they should do, given they have that captive audience of clients?” he added.
Beaney agrees with Robertson’s view. He says anyone considering using an integrated offering should ask to see a detailed breakdown of costs, alongside their track record of risk-adjusted performance. This helps to indicate the amount of risk they have taken to produce returns.
“If you go to an independent financial adviser, they will do that work for you. If you go to a vertically integrated or an integrated firm you may have to ask them to produce those numbers for you,” he added.
Robertson also advises asking the integrated business about how they manage conflicts of interest and whether they have a policy that articulates this.
Dawn Hyams, head of investment insight at consumer research consultancy Wisdom Council, suggests that integrating financial advice and investment management is not necessarily a bad thing, particularly if a client finds it easier to deal with one company.
If you are considering investing with a large vertically integrated business in theory you should benefit from cost savings coming through, so Hyams says it is important to make sure this is happening. Likewise, what is the underlying investment proposition?
“It depends how closely you are monitoring costs, allowing the benefits of scale to feed through to cost savings and exactly what funds are sitting inside those solutions,” Hyams explained.
“Ensure that you either have genuine “whole of market” or you are looking at low-cost value for money solutions. And the company is using that end-to end cycle of the customer’s journey to deliver a better experience and outcome,” she added.
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