A Client Must Read: The Dangers of Vertically Integrated Charging Models in Financial Planning

As an Independent Financial Adviser with a diverse background that spans circa 18 years, working across various types of businesses, including restricted, independent, multi-tied, national, and regional firms, I've gathered a wealth of experience that has shaped my own business. This journey has offered me a broad perspective on the inner workings of the financial planning industry, particularly regarding charging models and their impact on clients. Today, I want to share my insights and thoughts on a critical topic that could impact many investors: the dangers of vertically integrated charging models within financial planning.

The Essence of Vertically Integrated Charging Models

In the realm of financial planning, a vertically integrated model is one where a single firm captures advisory fees, platform charges, and investment charges. This model might seem efficient at first glance, offering a streamlined approach to managing your investments. However, it's crucial to understand the inherent risks and conflicts of interest that such a model can introduce.

Understanding the Conflicts of Interest

1. Conflicts with In-house Platforms: Imagine a scenario where the in-house platform underperforms, experiences slow withdrawals, or the standard of servicing deteriorates. Despite these challenges, replacing an in-house solution becomes nearly impossible if the firm profits from the platform fees. This conflict of interest can prevent the firm from seeking better, more efficient solutions that might serve the client's interests more effectively.
2. In-house Funds and Management Charges: When a firm manages its own funds and levies a management charge, a similar conflict arises. Even if these funds perform poorly or offer poor value, there's a push from management and directors to recommend them, driven by the profit motive. This scenario illustrates a clear conflict where the management's goal to please shareholders and achieve bonuses can overshadow the quality of the underlying investment solutions.

Other Disadvantages of Vertical Integration

• Lack of Innovation: A vertically integrated model can stifle the desire to innovate or seek out superior solutions. Firms might become complacent, preferring the status quo over exploring new, potentially more beneficial options for their clients.
• Blindness to Better Solutions: This complacency can lead to a tunnel vision effect, where firms are blind to newer, better solutions that could offer more value to the client.

The Advisory Relationship at Risk

The core issue with vertically integrated models is the natural creation of conflicts of interest, potentially distancing the adviser from truly sitting on the same side of the desk as you. Despite paying an ongoing advisory charge, you might find that your adviser's incentives are not fully aligned with your best interests.

A Visual Representation of Conflict

I recall a meeting where a graph depicted the client at the centre, surrounded by three interlocking circles labelled "Adviser Fee," "Platform Charge," and "Investment Management Fee." A director pointed to this arrangement, stating their goal to capture "all pieces of the pie." This visual succinctly captures the essence of the conflict inherent in vertically integrated models.

Conclusion

As you navigate your financial planning journey, it's crucial to be aware of the charging model employed by your financial advisory firm. Understanding the potential conflicts of interest and disadvantages of vertically integrated models can empower you to make informed decisions about who manages your investments and how. Remember, the goal is to ensure your adviser's incentives align with your best interests, fostering a relationship based on trust, transparency, and mutual benefit.

In conclusion, while vertically integrated charging models might offer certain efficiencies, the potential for conflicts of interest and other disadvantages necessitates a cautious approach. As your Independent Financial Adviser, my commitment remains to provide transparent, unbiased advice that places your interests at the forefront of every decision.

The information contained is opinion based (by me the author) and is for guidance only, it does not constitute advice, which should be sought before taking any action or inaction.