A few years back I interviewed Peter Hargreaves, one of the founders of Hargreaves Lansdown. The article received a lot of flak from grumpy advisers, annoyed that the feature seemed to imply that HL was a role model for all IFA firms.
I was reminded of this article with the news last week that HL’s chief executive Ian Gorham, who has steered the firm to even greater success since Mr Hargreaves and fellow founder Stephen Lansdown stepped back from day-to-day management, is also to step down in a year’s time.
I wish Mr Gorham the best of luck with his future and to his successor Chris Hill, the current group chief financial officer. Both deserve to see the business continue to prosper.
Looking back, the interview with Mr Hargreaves appeared at about the time the company was about to float on the stockmarket for about £1bn, making a number of directors millionaires overnight and grabbing the financial headlines.
HL’s main success was selling off the page, now online of course, but even then it had a growing financial planning arm which has continued to expand. So perhaps not a typical IFA firm in many senses, but a company which could, I have always believed, be one model for IFA expansion.
Why, though, does it provoke so much envy from other IFAs? Some criticise it as just being a selling operation, but clearly that is not the full story. Those clients who want advice can get it, but clearly many do not need it all the time.
Why does Hargreaves Lansdown provoke so much envy from other IFAs?I would never hold up HL as the only growth model for IFAs, many of whom run successful and expanding businesses, but it is an object lesson in business success. In some ways HL is the Apple of the IFA world, thriving in a sector that has struggled to grow.
It is worth remembering that chartered accountants Mr Hargreaves and Mr Lansdown started their fledgling business in a spare room as recently as 1981, after spotting a potential gap to sell investment products to clients who just wanted to invest some spare cash without the bother of going through an adviser – a need not being met at the time.
Today, the company is part of the FTSE 100 index and employs nearly 1,000 people. Its record, even recently, is hugely impressive: client numbers have risen since 2010 by more than 500,000 from 330,000 to 836,000; pre-tax profit tax in the same period rose from £86.3m to £218.9m; assets under administration were up from £17.5bn to £61.7bn (+252 per cent); and so on. HL has shown that running an investment business dealing with retail clients can be hugely successful and profitable. So why are there not more Hargreaves Lansdowns?
This is a question that baffles me. To be fair, a number of firms are trying a similar approach and doing pretty well. Tilney Bestinvest and others spring to mind, and the fund supermarkets offering a consumer option, such as Fidelity FundsNetwork, have done well. Even so, more could try the same approach. If retail investing is to become a genuine mass market in the UK, we need half a dozen Hargreaves Lansdowns with the same drive and ambition.
I was discussing the issue of why more IFA firms did not follow HL’s lead with a colleague recently, and one issue we debated was the model that most IFAs and financial planning firms follow. It is, fundamentally, a low-growth model, and this may be one of the issues.
Most IFAs, financial planners and wealth managers see themselves traditionally as professional services firms, and this will always limit growth to a localised, referral-based approach. It does not stop growth, but makes rapid growth and scalability much harder to achieve.
Most IFAs see themselves as working with a small number of well-off clients, perhaps 150 to 200. The model dictates that these clients will then pay relatively high fees to enjoy the personalised service of an adviser. Advisers are fundamentally, at least nowadays, paid by the hour. IFAs are nice, small-scale businesses, but scaling them up is always going to be a challenge.
Many IFAs enjoy a decent living, and their clients receive one-to-one attention, so why rock the boat? That is a question for IFAs to answer, but probably comes down mostly to risk and reward. It does suggest, however, that many IFAs who want to run rapid-growth investment firms probably have completely the wrong model.
This is a shame because if HL has proved one thing, it is that there is an appetite for direct retail investing. I would wager that many of HL’s 836,000 clients have never seen an IFA or even considered seeing one. Finding the right model to reach these people could well be one of the biggest challenges for IFAs over the next decade.
Kevin O’Donnell is a financial writer and journalist
