Largest retail financial firm reaches over £100bn assets under management but at great cost

One of the difficult metrics to achieve within the retail electronic trading sector is a definitive and high ‘assets under management’ (AUM) statistic, largely due to the leveraged nature of many OTC instruments.

Therefore, when a company that serves a direct retail audience and achieves a very high level of custody in terms of client assets, it is, not to put too fine a point on it, a very big deal indeed.

This week, Bristol-based Hargreaves Lansdown, which is the largest retail multi-product investment firm in the world has gone over the £100 billion assets under management mark.

Yes, there are large firms in North America, such as Scottrade, e*TRADE and Charles Schwab, but these are retail stockbrokers with High Street brnaches rather than comprehensive service providers of all areas of retail finance via one online platform – Hargreaves Lansdown only has one office, and has and has more in common with retail CFD and FX providers combined with challenger banks than it does with America’s large stockbrokers.

Hargreaves Lansdown has achieved this without using an affiliate partners, and by maintaining a customer base of only British clients. There is literally no overseas business at all.

In the year to the end of July, net revenue rose 7 per cent to £480.5m while pre-tax profit increased by 5 per cent to £305.8m. Astonishing figures indeed, and whilst it is a very quiet entity in true modest yet polite Bristolian fashion, the firm is absolutely regarded as an enviable work of genius by most senior executives in the FX industry.

A few years ago, I was in the office of Kim Fournais, CEO of Saxo Bank, our conversation being on how to provide platforms that are open source, and allow all types of product to be controlled from one interface, rather like the Hargreaves Lansdown Vantage system. The eloquent and astute Mr Fournais responded “Yes, that is one of the ideologies behind our OpenAPI, and of course I would love to be compared to Hargreaves Lansdown!”

Such is the esteem the firm is held in, however for the first time in its 37 year history, Hargreaves Lansdown has now demonstrated a crack in its armour.

Whilst £100 billion in AUM is astonishing and a figure to be very proud of, the entanglement in the Neil Woodford affair has cost Hargreaves Lansdown some of its credibility in the eyes of very loyal customers with whom Hargreaves Lansdown has worked very diligently over the years to gain such unfaltering trust.

With nearly 300,000 Hargreaves Lansdown customers exposed to the inability to withdraw or trade their portfolios due to the Woodford scandal, revelations that senior figures cashed in HL shares days before the crisis came to light have not gone down well.

Additionally, former IG Group CFO Chris Hill who became CEO of Hargreaves Lansdown two years ago waited until the eleventh hour — the eve of the latest results announcement — to say that he and his colleagues would forgo their bonuses, representing a nasty hit for executives of the firm.

Just yesterday, Jayne Styles hit the bricks, announcing her resignation and that she will not stand for re-election at the firm’s AGM. Being a publicly listed company, there was a specific commerical reason proffered, with Hargreaves Lansdown today having confirmed to FinanceFeeds that she wants to devote more time to her executive career.

Ms Styles is a non-executive at Hargreaves Lansdown, which means that she doesn’t receive a bonus, but it is well worth considering what action anyone in an executive position would take if they had been provided with no bonuses despite the firm’s sterling performance and the possibility of being involved by proxy in an inextricable situation with one of the most disgraced wealth managers in England.

Mr Hill forfeited £2.1 million in bonuses in order to attempt to show the public a degree of personal diligence and responsibility in the light of the Woodford scandal, however if members of the board are leaving, it may show the way ahead, and of course in Bristol, leaving a very senior position such as being a board member of Hargreaves Lansdown is not to be taken lightly, because unlike London, it would likely mean relocation because although Bristol does have a small financial sector (mostly insurance companies) there are no high ticket careers compared with the tens of thousands in London.

Unfortunately, it may well be a case of Hargreaves Lansdown having trusted Neil Woodford’s asset management firm and went on reputation alone – Woodford enjoyed a massively elevated public image when the reality is that it is just an upper class version of a retail broker which doesn’t allow withdrawals and runs away with client money. Odiousness in a Jermyn Street suit.

Of course, the good fortune is that it is based in the UK meaning that there will be compensation of up to £85000 for those who aren’t compensated, and Woodford and Hargreaves Lansdown have promised to return funds to clients upon resolution, but the principle remains the same.

Today, British financial markets commentator Robin Powell said “Hargreaves Lansdown is just like the rest of the UK investing industry: much as it would like things to stay as they are, it surely knows the writing is on the wall and it has to change. Otherwise it will gradually lose the market dominance it currently enjoys.”

Hard as it may be to accept for such a successful and well regarded firm, he may well be right. After all, electronic financial services has a massively fast evolutionary dynamic.

“I’m not saying fund lists have to go. They just need to be more useful. They have to include low-cost index funds and be much more focused on cost. Research by Morningstar shows that cost is the most accurate predictor of future performance; in other words, the less you pay, the higher your net returns are likely to be. Why can’t Hargreaves produce a list of the cheapest funds? And how about a list of funds that are totally transparent about their fees and charges?” said Mr Powell.

Historically, HL has used its commercial muscle to drive down the price of actively managed funds. It has to continue doing so. There’s nothing wrong with active management in principle — it’s really just the cost that’s the problem — and Hargreaves has an important part to play in making it better value.

FinanceFeeds is an absolute advocate of the need for FX firms to move into the professional trading and hedge fund sector, largely because many good quality FX brokerages along with their associated prime of prime liquidity providers and technology vendors that integrate platforms into a multi-asset market are more than capable of providing a highly efficient direct market access solution for wealth managers with a diversified asset requirement at low cost with efficient execution.

This industry is, after all, a massively entrepreneurial and innovative sector, far more than the traditional hedge funds are.

As leverage contracts and the need for multi-asset trading rises, there is absolutely no reason why retail FX brokerages cannot go for higher AUM and get involved in this very lucrative and sustainable sector, and get a higher valuation for your brokerage at exit time.

More assets under management and a better, more long term client base of astute, domestic market loyals is the way to corporate value.

Last week, Gurjit Kambo, an analyst at JP Morgan Cazenove, said in a note to clients that customer deposits of funds into Hargreaves were likely to be affected by the Woodford debacle.

“With investors in Woodford’s equity income fund still gated, and the relationship between Woodford funds and Hargreaves Lansdown under increased scrutiny, we have reduced our inflow estimates,” Kambo said. He cut his estimates for new funds for 2020 to £5bn from £7.9bn and to £5.5bn from £9bn the year after.

This is effectively white noise. FX firms in Australia, the US and Britain have been wound up by regulators, their responsible officers criminally prosecuted and assets seized time and time again for practices far less grim than this. Yes, they should pay the price, but everyone should pay the price, not just retail FX brokers.

Hargreaves Lansdown, whose Vantage system allows retail investors and traders to manage their accounts from endowments and ISAs to FX and CFD trading in one place, has been getting more into the FX and CFD space and expanding its range, having recently launched a product which is aimed squarely at the self-directed retail investor.

This is offered via Hargreaves Lansdown’s IG Group white label HL Markets, wrapped into Hargreaves’ highly sophisticated proprietary infrastructure.

For a company whose assets under management rocketed from £85 billion to over £100 billion in a year, all of which are represented by long term, domestic clients to have disincentives in place for management due to the mess it got itself into with Woodford, the reason for the downcast mood is not lack of business, it is lack of credibility for the first time in Hargreaves Lansdown history.

I hope they resolve it and get through it – Hargreaves Lansdown has been a role model for most electronic financial services firms ever since it morphed from a small independent insurance brokerage in Clifton in 1982 into the electronic multi product giant it is today.