From humble beginnings in a Bristol bedroom in 1981, to FTSE 100 stalwart, investment platform provider Hargreaves Lansdown is undoubtedly one of the corporate success stories of recent times. Last week it delivered another great set of results, with profits and dividends both up by 31%. Rising stock markets have resulted in more trading by its customers, and have also boosted the amount of money it has under management.
The Retail Distribution Review has also been good to the company so far. These regulatory changes have driven lots of new business to the firm, as many financial advisers have left the industry now that commission on new fund products has been banned, and advisers have to be better qualified. This has seen many investors take charge of their own money, whether by choice or necessity, which has boosted Hargreaves’ user numbers. But is this as good as it gets?
The company has built a fantastic business backed by marketing and branding that is tough to compete with. Its profit margins of 63% are evidence of that. However, its Vantage investment platform still gets 56% of its income from trail commissions paid by fund managers on funds bought before the end of 2012. These costs (less rebates) are borne by its customers’ investment accounts, which looks an expensive arrangement for what they get in return.
The move to ‘clean funds’ that don’t pay commission means investors can save a lot of money. Hargreaves will have to replace this commission income by charging a platform fee. The Vantage platform is still earning 0.68% on customer assets, whereas some brokers now charge just 0.25% to hold clean funds. Hargreaves hopes the introduction of ‘super clean’ funds with very low charges will keep customers happy. How it keeps shareholders happy at the same time remains to be seen. As good a business as it is, on nearly 28 times earnings, the upside looks limited.
Verdict: too expensive