It wasn’t so long ago that the term “vertical integration” belonged to supermarket chains and other oligopolies relentlessly pursuing margins across all parts of the value chain.  Now it seems that vertical integration is the term on the lips of many financial services players, although the proposed means of achieving it range from “lipstick on a pig” to complete “make-overs”.

The quest for the holy grail of extracting maximum efficiencies and competitive advantage via vertical integration is not limited to the larger industry participants in the retail sector and amongst industry funds.  More recently, T&C has observed financial planning boutiques seeking ways to expand their participation across the value chain, particularly in the area of portfolio management.  As always though, the efficiency gain and margin extraction is only sustainable over the long term if the client is at the centre of any such initiatives, and this will not be the case if vertical integration is achieved in name only, by stacking shelves with “own-brand” product or by merely applying sufficient make-up to cover the wrinkles in otherwise out-dated processes.

Vertical integration can result in the legitimate delivery by advisers of value-added services across the value chain.  Vertical integration done properly can benefit each of the client, practice principals and the staff – “done properly” being the operative words.

Its time has come, particularly in the area of portfolio management.

Goal-based advisers, with a keen eye on portfolio management as an enabler, rather than as the main end-game, can take advantage of recent trends in the industry to vertically expand into portfolio management to deliver:

  • Better portfolio, and hence client, outcomes
  • Transparent and sustainable revenue streams to the practice, as well as operational efficiencies
  • Career development for staff.

There are a number of strategies for delivering vertical integration at the portfolio management level including model portfolios, multi-manager unit trusts and managed discretionary accounts (MDAs).

There are pros and cons for each and, in some cases, financial planning practices will run more than one strategy to cater for different client segments and behavioral characteristics.  One leading boutique practice that T&C knows has spent a lot of time on their model and offers a unit trust structure for its mass affluent clients (on a naked priced platform) and an MDA structure for its HNW clients (on a different platform).

And here’s where a key question comes up (and it’s not just the question “how do I get paid” – there are ways and means under each strategy).  The key question is – who actually does the portfolio management?  Insourced, outsourced, or partly insourced in partnership with a specialist portfolio adviser?

Many boutique practices do not have the expertise, depth of research or sophisticated systems required to fly solo on portfolio management and, in any event, there are major benefits in tying up with a portfolio adviser who also serves as an aggregator of FUM (not to mention the challenges presented by mooted capital adequacy requirements).

Whilst exposing the pros and cons of each portfolio management strategy is beyond the scope of Fortissimo, it’s worth recording that T&C has noted the increasing volume of discussions around MDAs of late.  MDAs clearly offer some benefits in terms of active asset allocation, customized portfolios, cost saving and operational efficiencies.

Regardless of whether model portfolios, unit trusts or MDAs are utilised to achieve vertical integration into portfolio management, a clear and cohesive strategy centred round client needs is essential in order to realize the three levels of benefits referred to above.  Essential elements of such a strategy include:

  • Matching client needs, particularly the intended target segment recognising that different segments can have different needs.  Determining the degree of tailoring and choice, dynamic asset allocation, active portfolio risk management, reporting, etc is essential
  • Having a clear investment philosophy, stress-tested and clearly explained
  • Achieving alignment on a number of fronts:
    • Alignment with the business model
    • Alignment with the desired client experience
    • Alignment with the organisational processes and procedures
    • And most importantly, alignment with the organisation’s belief’s regarding client outcomes.

The tools are available to do vertical integration well and in the interests of the client, the practice and staff.  Better to develop the strategy that leads to a sustainable make-over rather than just donning some “lippie” on the pig.