A greater level of vertical integration in companies could lead to better outcomes for consumers, a recent study by the University of Melbourne has found.
This result even held true for industries that were relatively concentrated.
"We find, somewhat surprisingly, that vertical integration is more likely to be pro-competitive if the industry is more concentrated," University of Melbourne senior lecturer Simon Loertscher said in a recent working paper.
This effect could even be achieved in some cases where integration bordered on a monopoly.
"In the extreme, even monopolising the downstream market can enhance consumer welfare because the integrated firm expands its quantity by a very large extent after integrating," he said.
The results of the study showed that regulators, such as the Australian Competition and Consumer Commission, should actually be more suspicious about vertical mergers when there are more firms in a particular industry, rather than fewer.
"Our model thus suggests that antitrust authorities should be particularly wary of vertical integration in relatively competitive industries," he said.
The wealth management and financial planning industry is experiencing an elevated level of vertical integration as the Future of Financial Advice (FOFA) reforms are expected to favour either very large companies that control all aspects of the value chain or small, boutique advisory firms.
This could mean that a number of mid-sized firms would not survive, reducing the number of players in the industry.
"The rush to vertical integration is to try and take some margin from each part of the chain: advice, administration and funds management (even custody)," Hunt's Group consultant Wayne Wilson said.
"The rush to size is that, with margin squeeze, only large administration systems will have the scale to continue to build and maintain code and at the same time make a reasonable profit," Wilson said.
"New scale targets are probably in the $200 billion to $300 billion range for the largest players," he said, referring to funds under administration.
At the other end, consumers will still pay for advice and the adviser will be the least likely to give in, Wilson said.
The study by Loertscher suggests that this rush to vertical integration could actually lead to lower prices for clients of financial planners.
However, Loertscher's research was not based on the wealth management industry and he was hesitant to apply its conclusions to the industry.
Paragem managing director Ian Knox said that one of the reasons why business models in the financial planning industry are being revised is that FOFA will eliminate volume payments from platforms, leaving dealer groups out of pocket.
"Dealerships have been living off the revenue split of product manufacturing," he said.
"Now, their value proposition has been questioned.
"The truth is dealerships have not been providing advice, they have been providing back office services and they have not charged the right amount."
But he also pointed out that planning groups that considered vertical integration would take onboard conflict of interests as they would be recommending products they manufactured themselves.
"That is the question: 'Do you want to have the conflict of products or not?' It is as simple as that," he says.
"The answer should really be: charge more for advice and drive down the cost of manufacturing. If that happens, the outcome will be that the advice industry will grow in value."
