Forty years after a pivotal meeting between Hargreaves Lansdown founders Peter Hargreaves and Steve Lansdown, where they set out the vision for the company, it now finds itself at a crossroads.
At a meeting where the two executives decided whether to be the "biggest" or the "best", they concluded that in fact they needed to be both. But while they are both billionaires, and now past retirement age, various challenges have caught up with the firm, and have cast a pall over the once indomitable business.
Changes to markets, regulations and technology have all had an impact, so that the shares now trade at a third of their initial public offering price, and the latest set of results, released on February 22, revealed declining growth in new money coming on to the platform and lower profitability.
The share price fell 8 per cent on the day as a consequence.
While profit levels reached £183mn, £132mn of that figure was attributed to the interest the firm earns on client cash, that is, clients that have cash balances.
The money is placed by Hargreaves Lansdown into banks, and the business retains 41 per cent of the gain, with clients getting the rest.
That figures implies the core Hargreaves Lansdown business, with its £142bn of assets under management and 1.2mn customers, generates an operating profit of around £51mn.
Challenging times
The business is facing a number of challenges. Among them are regulatory issues, an ageing client base, challenges from newer incumbents and changing technology, and the prevailing economic conditions.
Stuart Duncan, analyst at Peel Hunt, says in a broker's note that the sluggish growth in new customer numbers this quarter was made up for by the gains on client cash.
This feeds into some of the regulatory challenges, notably that the Financial Conduct Authority wrote to platforms, including Hargreaves Lansdown, in 2023 via 'Dear CEO' letter to remind all firms of their responsibilities to treat customers fairly on this issue.
In a call with media on the morning of the results, the company’s chief executive Dan Olley said the 'Dear CEO' letter had not prompted a change in policy from the firm, as they felt their current approach satisfies any regulatory obligations.
Lower base rates are likely to impact the amount of cash that is generated from this source, as the commercial banks offer lower savings rates.
The more pertinent question might therefore be: is Hargreaves Lansdown attracting the next generation of clients?At present, Hargreaves Lansdown bundles together all of the client cash and uses the scale of this deposit to attain higher rates on saved cash than each client individually with a smaller pot of money could.
In terms of where the turnover was generated, advice produced turnover of £3.5mn, platform charges generated £1.35mn, while fund management turnover was the bulk of the remainder.
A second regulatory issue may be the impact of a potential legal action by a group of claimants who had invested via Hargreaves Lansdown in the stricken Woodford Equity Income fund.
In the results statement, the company brushed off any potential impact from this, stating: “The company received a letter purporting to be a pre-action letter from a law firm in March 2021. In June 2021, the company rejected all the claims made for lack of a substantive basis of claim.
"The company is aware that the law firm has since filed a claim form with the court against both Link Fund Solutions Limited and Hargreaves Lansdown Asset Management Limited (HLAM) for an unspecified amount in October 2022.
"As at the date of issuing these financial statements, the law firm has not yet confirmed that it has secured sufficient funding to progress the claim, HLAM has not been served with the claim form and no timetable has been set for the conduct of any claim.”
Economic climate
On the prevailing economic outlook, Neil Shah, director of research at Edison Group, says net inflows were £1bn, down from £1.6bn the prior year.
And even that number does not tell the full tale, as the accounts show a net of £300mn was actually withdrawn from the company’s investment products, and the corresponding £1.43bn of inflows was into cash products.
Hargreaves Lansdown's Olley says one feature of the withdrawals is that "clients are not withdrawing their investments from us to go to another platform, instead it is to pay down debt".
Demographic issues
A feature of markets in recent years has been the desire of younger investors to own alternative assets or direct equities rather than funds.
Hargreaves Lansdown to a large extent has a foot in both camps, as its clients can invest in funds or equities.
The more pertinent question might therefore be: is Hargreaves Lansdown attracting the next generation of clients?
Olley says that while the average age of a Hargreaves Lansdown client is 45, the average age of a new client is “under 30”, but says one feature of this new client group is they are keener on buying overseas equities, such as US technology stocks, than is the average Hargreaves Lansdown client.
A second regulatory issue may be the impact of a potential legal action.Duncan has a buy rating on the stock, as he says the recent share price performance is a function of investors being concerned about the prospects for markets as a whole, rather than a view on the business model of the firm.
Fund manager Nick Train is among the largest shareholders in Hargreaves Lansdown. Previously he has highlighted in his investment reports the capacity for the firm to grow as stock markets grow.
In his most recent update to shareholders in the Finsbury Growth and Income Trust, he says the ability to use artificial intelligence as part of the customer experience may be a key advantage for the firm in future.
In the media call, Olley says he views the use of AI not as a route to robo-advice, but as a way on processing client data.
How Hargreaves Lansdown deals with the challenges it faces in the coming years will likely have a material impact on the rest of the industry.
David Thorpe is investment editor of FT Adviser
