The Secret of Success for Hargreaves Lansdown

By Angus McCrone, The CA Magazine

10 April 2019

The stockbrokers may still be the real winners when it comes to investment but there are still hazards, argues Angus McCrone. He examines the case of Hargreaves Lansdown, one of the best performing stockbrokers of the last decade.

‘Where are the Customers’ Yachts?’ is the title of a 1940 book by Fred Schwed Jr, a former stockbroker on Wall Street. Schwed pointed to the luxury boats owned by high-flyers in his erstwhile profession, and asked whether it was the brokers, rather than their investor clients, who prospered from the relationship.

Nearly 80 years later, you could be forgiven for thinking plus ça change, plus c’est la même chose (“the more it changes, the more it's the same thing”).

If you look at the best-performing stocks in the FTSE 100 index over the past ten years (as it happens, exactly a decade since the market hit its post-financial crisis low, on 9 March 2009), one of those has been the London Stock Exchange, and another – with a gain of 1,060% – has been stockbroker Hargreaves Lansdown.

The latter demonstrates plenty of reasons to explain its stellar performance as a stock.

Secrets to consistent success

Renowned for effective marketing, Hargreaves’ early embrace of Internet stockbroking, its efficient and responsive back office, and clever ploys to attract accounts from rivals (such as the offer of cash inducements to transferring customers), Hargreaves Lansdown is valued now at £8.1bn by the stock market and employs 1,300 people.

Online stockbroking is a business tailor-made for the current era, and it looks likely to stay relevant for the future too.

The byzantine complexity that Osborne created in the taxation of savings and pensions has probably helped the business too.

The long housing boom, the gradual retirement of the baby boomers, longer lifespans, and the pension freedoms introduced by former Chancellor George Osborne in 2014 have given many more people reason to hold wealth for the future in Individual Savings Accounts or Self-Invested Personal Pensions.

I would add that some of the byzantine complexity that Osborne created in the taxation of savings and pensions has probably helped the business too.

How much can you put into your pension without incurring penalty-rate tax? Can you withdraw a tax-free lump sum, and what are the implications of doing that?

Will your dividends be taxed? You can pay a financial adviser to tell you, or alternatively you can rely on the well-informed help desks of Internet stockbrokers for your answers.

The challenges ahead for the stock market

What could possibly go wrong? One issue that tends to catch up with any very successful company in a growth sector is competition.

Hargreaves Lansdown is estimated to hold 40% of the DIY investment market, and to generate revenues – from equity holding charges, fees for holding funds, fees for management of multi-manager funds and (via low interest rates) for holding client cash – that may be vulnerable to pressure from a no-frills, or lower-frills, competitor.

Holding onto that market share will be one of the firm’s big challenges over the next few years.

In the half-year to December 2018, Hargreaves Lansdown made net revenue before operating expenses of £236.4m on assets under administration of £85.9bn.

That is equivalent to an annualised £550 per every £100,000 of client money held. Even if you look at the pre-tax profit, after operating expenses, it would be an annualised £343 per £100,000 of client balances.

You do not have to see a Jeremy Corbyn government as likely in order to think that some form of wealth tax could be seen as an option by a future administration.

There are also external hazards. One is the fact that the global stock market upturn, celebrating its decade this spring, has been a long one by historical standards and could be threatened by (to name a few) trade wars, political instability in the US or Europe, a climate emergency in an important economic region, or a credit crunch in China.

A depressed stock market would mean lower fees, probably lower trading commissions if investors are too nervous to transact, and probably also fewer new clients.

There is also the underlying risk that, in the years ahead, Western economies may turn to increased taxes on wealth.

You do not have to see a Jeremy Corbyn government as likely in order to think that some form of wealth tax could be seen as an option by a future administration.

Peter Hargreaves, one of the founders of the company, now a billionaire and still a major shareholder (although not a director or employee) is an outspoken individual. No doubt he would have something to say about such a move, but for now the firm looks to be in a good place.

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  • Financial Services
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