“Huge numbers of independent financial advisers are incompetent,” Peter Hargreaves, co-founder of Hargreaves Lansdown, told the Financial Times in 2007, on the eve of the investment manager’s flotation.
The plan was simple. Hargreaves Lansdown would enable customers to bypass the old guard of financial advisers and dispel the notion that investing was solely the preserve of the ultra-rich.
The company offered ordinary British savers a self-service marketplace in which they could buy and sell funds, compare investments from different providers and pour their money into the burgeoning UK stock market without the help of a commission-hungry stockbroker or financial adviser.
And for more than a decade on the public markets, the model thrived. Bristol-based Hargreaves Lansdown grew into the UK’s largest DIY investment platform and so-called funds supermarket, with 1.8mn clients who use it for everything from stock trading to pension planning and financial news. It has grown to more than £134bn in assets under administration — almost twice that of its nearest domestic competitor.
But that dominant position is now under threat from sweeping changes to the investment landscape, most notably tighter regulation and intensifying competition from a new generation of digital platforms, which aim to make better use of technology and charge much lower fees.
For many of its upstart rivals, Hargreaves Lansdown has come to resemble the financial advisers it once derided — clunky and expensive.
These shifts in the industry are compounding the company’s own struggles: a difficult tech transformation, the reputational fallout from its entanglement with disgraced star fund manager Neil Woodford, and what some see as a loss of entrepreneurialism since its eponymous co-founder Peter Hargreaves stepped down as chief executive in 2010.
“There’s been a lack of innovation in many areas . . . in delivering value to customers,” says Dan Squires, head of UK sales at Saxo, a Danish-headquartered brokerage which is making a big push in the UK. “That’s the problem with incumbents; it’s not in their interest to cut costs when they have a huge book of business.”
Even Hargreaves, who remains its single largest shareholder with 20 per cent of the company, has become disillusioned. A year ago he launched a scorching attack on the company’s management and strategy, lamenting that it has “been one of the worst performing shares in the FTSE 100”. His criticism was followed by the resignation of the then chair, Deanna Oppenheimer.
Costs at the company have increased faster than revenues. Staff costs increased almost 200 per cent between 2013 and 2023, as it tried to upgrade its technology, while revenues are only up 93 per cent in the same period, according to Financial Times calculations.
In December, Hargreaves Lansdown was pushed out of the FTSE 100 index for the first time since 2011. Its share price is down two-thirds from its May 2019 peak.
And in a sign that investors think its stock has further to fall, the company is the third most shorted stock in the UK, with just under 15 per cent of its shares out on loan, according to data provider S3 Partners. Among those with short positions are BlackRock; hedge funds Kintbury Capital, Millennium Management, Citadel and Marshall Wace; and CPP Investments.
A hedge fund manager who has a short position in Hargreaves Lansdown says that its business model is “structurally challenged . . . it has a very high market share, but it provides an inferior product and overcharges for it”. He estimates that the combination of fee cuts to bring itself more into line with competitors and an end to a temporary rise in profits it makes from holding client cash could herald a 70 per cent drop in earnings.
A second investor with a short position adds: “Hargreaves Lansdown is suffering from increased competition, and market share and margins are under pressure . . . they are one of the most expensive providers in the market, and a significant technology upgrade is required.”
The questions about the company’s model are hitting at a moment that should be a huge opportunity for investment platforms.
Private-sector workers in the UK are moving away from defined benefit pension schemes — where they receive a guaranteed income for life based on their final salary — to defined contribution schemes, where workers’ contributions are invested and their income in retirement depends on the performance of those investments.
While the defined contribution market is largely separate, this shift in the way company pensions are organised is educating potentially millions of people on how to manage their savings, often using online platforms.
Analysts believe that means there is plenty of scope for the platforms for grow. Hargreaves Lansdown’s customer base of 1.8mn customers is equivalent to fewer than 3 per cent of the UK population. In contrast, leading Swedish platform Avanza has a customer base equivalent to more than 17 per cent of the Swedish population, while leading US platform Charles Schwab’s customer base is equivalent to about 10 per cent of the US population.
“People need to save more for retirement and the government wants to see a better culture of investing,” says Andrew Lowe, an analyst at Citi. “The volume opportunity is large for Hargreaves Lansdown; the key question is, can they sustain their market share?”
Hargreaves Lansdown’s chief executive Dan Olley, who took over the top job in August, has the task of convincing investors and clients to stay the course. On Thursday he will present the company’s half-year results, which analysts see as an opportunity for Olley to articulate his strategy and potential changes to pricing.
A spokesperson for Hargreaves Lansdown said the firm is “investing in our service, digital experience and automation to strive to give our clients a great client experience and make us a leaner and more agile business”.
Julian Roberts, an analyst at Jefferies, says: “The new chief executive has the chance to persuade the market . . . to change our minds about the feasibility of their new strategy.”
Hargreaves Lansdown’s first disruptive innovation, back in the 1980s, was to negotiate down the initial investment charges levied by fund managers from around 5 per cent to zero.
By the time of the company’s initial public offering in 2007, which valued it at more than £750mn, it had 350,000 customers and roughly £10bn in assets under administration.
Hargreaves Lansdown was joined in 1995 by two lower-cost competitors, which originated in Manchester in the north of England: AJ Bell and Interactive Investor. AJ Bell presents itself as a more digital friendly alternative to Hargreaves Lansdown, charging a 0.25 per cent annual charge (on accounts with less than £500,000) compared with Hargreaves’ 0.45 per cent for a stocks and shares ISA (up to £250,000).
Interactive Investor, on the other hand, which was acquired by FTSE 250 asset manager Abrdn in 2022, charges a fixed subscription fee alongside trading costs, which can dramatically reduce the amount investors pay in fees over time, especially for those with larger balances.
While Hargreaves Lansdown has about two-fifths of market share in the roughly £369bn market for DIY investing, it stands out against its peers for its higher fees.
It costs £11.95 to trade a listed security on Hargreaves, compared with £3.99 on II, and £5 on AJ Bell from April. Robinhood, eToro and Trading 212 offer commission-free trading. Hargreaves Lansdown does not charge to buy or sell closed-end funds and caps the platform fee for exchange traded funds and listed securities like shares at £45 per year.
An investor with £250k in funds in an individual savings account, a tax-efficient savings vehicle for UK residents, will pay total annual fees of £1,125 on Hargreaves Lansdown, against £637 for rival AJ Bell and £144 for Interactive Investor, according to calculations by the Financial Times and Boring Money.
Across the sector, there is pressure on fees. AJ Bell has lowered charges after an industry-wide rebuke from the UK regulator, and Denmark’s Saxo also recently cut its fees.
UK incumbents are increasingly having to contend with a broadening range of competitors. This encompasses everything from low-cost investment platforms like Vanguard; new online brokers such as eToro and Trading 212; international entrants such as Interactive Brokers and Saxo; and fintech banks like Revolut and Monzo.
While some of these platforms do not offer the full range of investment products, especially mutual funds, their comparable fees for share dealing and investment are often much lower and they tend to be technologically sophisticated.
One Hargreaves Lansdown shareholder says the company has seen off such challenges before: “There have been a lot of new entrants over the past decade, but very few have taken substantial market share.”
But crucially, analysts say that younger customers tend to make an initial investment foray through new brokers and fintechs, which place a greater emphasis on trading individual stocks and cryptocurrencies than they do buying and selling investment funds.
“One way to give savers confidence is via the old man in a suit, for the generation who has a strong belief in experts and institutions,” says Ben Stanway, co-founder of Moneybox, a savings and investing app that has 1.3mn users. “However, the world is changing and we believe the next generation will achieve confidence and . . . great financial outcomes through data-led, beautifully presented digital experiences.”
Robinhood, the online platform that shot to prominence in the US during the Covid pandemic, is unveiling its brokerage service in the UK and has set its sights on unseating incumbents like Hargreaves Lansdown.
In the short-term, higher interest rates have come to Hargreaves Lansdown’s rescue.
This is because of a jump in the interest rate margin — the difference between the rate the company pays to clients on their cash held on the platform and what it gains from depositing it at the secured overnight financing rate. In the 12 months to June 30 last year, net interest income grew more than five times on the previous year and accounted for 37 per cent of revenues and two-thirds of profits.
“Earnings would have collapsed if rates hadn’t gone up and they hadn’t overcharged clients for their cash,” says the first short seller.
This has caught the attention of regulators. The Financial Conduct Authority has written to platforms’ chief executives to raise questions about the amount of interest offered on cash deposits, giving them until February 29 to ensure that the amount of client interest they withhold is “fair”.
A spokesperson for the company said: “We pay clients highly competitive interest on the cash held in their investment and pension accounts.”
Hargreaves Lansdown is still paying the price for its role in one of the biggest British investment scandals of the decade.
In 2019, one-time star fund manager Neil Woodford’s £3.7bn LF Woodford Equity Income fund was frozen after investors rushed to withdraw their money. Hundreds of thousands of savers were unable to access trapped savings as the fund’s illiquid, hard-to-sell holdings prevented it from paying them out.
Hargreaves Lansdown also found itself facing heavy criticism from clients. The platform had marketed the Woodford fund on its “Wealth 50” best-buy list and championed it to clients, offering them a substantial fee discount if they invested in Woodford’s fund via the Hargreaves Lansdown platform.
£200mnPotential size of claim that litigation company RGL is pursuing on behalf of more than 3,000 investors for recovery of losses sustained from the Woodford fund
The platform continued to recommend the Woodford fund until the day it was suspended. In contrast, AJ Bell took it off its own best buy list a year earlier, when it was clear that the fund was suffering liquidity and performance issues.
The Woodford episode damaged Hargreaves Lansdown’s credibility at a time when it was trying to build its own in-house advisory service and marketing its own branded funds. Its then chief executive Chris Hill apologised to investors for the platform’s role in the debacle and the company revamped how it recommends funds to investors. It scrapped the Wealth 50 best-buy list, replacing it with a new Wealth Shortlist, chosen by an independent panel.
But the damage to client trust had been done. RGL, a litigation company, is pursuing a claim against Hargreaves Lansdown on behalf of more than 3,000 investors for full recovery of losses sustained from the Woodford fund that it says could be worth £200mn.
Hargreaves Lansdown has struggled to grow its own £11bn asset management business, with no net inflows since 2017. A majority of own-brand funds have underperformed their benchmarks over the past five years according to FE Fund Info, and this month the company disclosed that two funds “delivered poor value to investors”.
The company has also faced criticism of its ageing IT infrastructure. In November 2020, a frenzy of trading among retail investors rushed to cash in on a sharp market rally triggered by positive Covid vaccine news.
Hargreaves Lansdown was one of at least 10 of the world’s largest brokers that found its systems overwhelmed. The UK platform experienced outages as well as thousands of duplicated trades, leaving some accounts in debt and causing extreme stress to investors.
Technical issues have been a recurring complaint of Hargreaves Lansdown users. One of its former executives says the firm prioritised paying dividends to shareholders, which in 2022 consumed more than 80 per cent of earnings, over funding improvements in its technology, website and app. “There’s been a total lack of proper investment,” he says.
The company unveiled a tech transition plan in 2022 to invest £175mn on upgrading technology, with Hill summarising the plan as “automating the hell out of everything” to improve service and cost efficiency. But investors baulked at lower profits and the suspension of a special dividend it had been paying, and it suffered its worst ever daily share price fall.
Some investors are optimistic that Olley — a former chief technology officer at publisher and data analytics company Elsevier — is focusing on the necessary technology investments. “I’m more positive on the technological transformation and now you have a chief executive who understands technology,” says the shareholder.
Hargreaves is also facing a demographic crunch. While its average client age has fallen slightly to 46 years old, it is struggling to attract younger investors at a fast enough clip. Its customer growth rate has slowed to its lowest level in a decade, while competitors gain ground.
One-third of its clients, accounting for 58 per cent of its total assets, are aged between 55 and 74 years old, according to an analysis by Redburn Atlantic, based on 2020 data. It warned that this generation of savers is “transitioning from being strong accumulators approaching retirement to being net decumulators in retirement”.
“My question for incumbent platforms like Hargreaves Lansdown would be how do you ensure you have a proposition that is appealing sufficiently to the younger generation so you have a pipeline of fifty-somethings coming through,” says Stanway of Moneybox.
But some remain optimistic about Hargreaves Lansdown ’s prospects. They point to the fact that the company has no debt, is cash generative and its stock is attractive to dividend-seeking investors. Others suggest that with its dominant market position, high free cash flow and strong consumer brand, Hargreaves Lansdown could be a potential acquisition target for a player looking to expand to the UK investment market.
Nick Train, co-founder of Lindsell Train, which owns 12.6 per cent of Hargreaves Lansdown and is its second-largest shareholder, wrote in the annual report for the Finsbury Growth & Income Trust that one way for the platform to accelerate growth “will be to take advantage of the data [it] generates, by dint of having more customers and more customer interactions than any of its peers”.
“This is a wealth platform, not a day trading platform,” adds Rahim Karim, an analyst at Investec, who called the company a “trusted player with a track record of delivery”.
“They don’t need to appeal to the meme stock trader.”