Yahoo Finance How fat fees put Hargreaves Lansdown in the crosshairs
When entrepreneurs Peter Hargreaves and Stephen Lansdown set up their company in a spare bedroom in the leafy Bristol suburb of Clifton the early 1980s, they could have scarcely dreamt the venture would one day make them both billionaires.
Over the past 40 years, Hargreaves Lansdown has grown into a FTSE 250 giant, a major employer with 2,000 staff and has become so ubiquitous that one in two UK retail investors uses it to buy and sell shares.
But in recent years the entrant of low budget alternatives to Hargreaves offering cheaper fees has left the business struggling to attract customer cash on the same scale.
A £4.7bn takeover offer from a consortium of investors led by Abu Dhabi and including buyout barons CVC Capital and Nordic Capital has crystalised the company’s fall from its perch and prompted questions over its future.
On Wednesday evening Hargreaves rejected the £9.85 per share bid, saying it undervalued the group and it was focused on pushing on with its strategy.
Shares soared by 23pc to £11.20, above the offer price, amid hopes the consortium or another rival bidder will mount a counter offer.
Any takeover of Hargreaves would herald the end of its 17 years on the London stock market, and underscore how the champion of the investment world was brought low by a price war for investors’ cash.
“Hargreaves Lansdown has been a phenomenally successful platform since its inception but now they’ve got a problem,” says Stephen Barrett, of financial services firm Cavendish.
“They’re a premier product and charge higher platform fees than pretty much anyone else in the market, and those platform fees are under attack.”
Low-cost operators including AJ Bell and Interactive Investors have managed to lure long-standing Hargreaves customers away from the platform by undercutting prices.
According to Citi, AJ Bell and Interactive Investor charge £5 and £4 respectively for each equity trade made through their platform while Hargreaves charges £12.
For some hard-headed armchair investors taking a punt on the stock market, the fees have prompted many to look further afield than Hargreaves for their investments.
Despite adding thousands of customers in previous years, higher fees triggered a slump in Hargreaves’ market share from 42.7pc to 40.7pc between 2020 and 2023.
Given the investing market has grown rapidly in recent years, the reduction in customers placing investments through Hargreaves has been even more pronounced.
But some experts say the fee issue is only at the margins, and most customers are not concerned about paying a bit more for a more premium funds supermarket service.
“If you buy a packet of biscuits at Waitrose you won’t be crying your eyes out that Aldi also sells biscuits,” says Panmure Gordon analyst Rae Maile.
“If you shop at Waitrose, you shop at Waitrose. The kind of people who choose Hargreaves Lansdown are not particularly fussed about the last few basis points. They want somewhere where it’s easier to invest.”
Aside from fees, part of Hargreaves’ challenge lies in its higher costs.
A £175m three-year investment plan to upgrade its creaking infrastructure meant costs were outstripping revenues, leading to some uneasiness from investors.
“It still has that premium perception about it but underneath the bonnet the business isn’t right,” says Cavendish’s Barrett.
Before the price war kicked off things were very different for the company.
Shares soared to a peak of nearly £24 in May 2019 under the leadership of then-chief executive Chris Hill, compared to just over £11 as markets closed on Thursday.
The Covid lockdown also spurred more activity as more home workers became armchair investors.
But a long running period of underinvestment and some regulatory run-ins has started to take the shine off the group.
Hargreaves had also been a significant promoter of the former star stock picker Neil Woodford. When his funds empire imploded in 2019, Hargreaves took a reputational hit that left it vulnerable.
An attempt to push into the broader wealth management industry and the £175m IT upgrade plan under Mr Hill triggered a rebuke from Mr Hargreaves.
He called the plan “completely unnecessary’ and launched an attack on Hargreaves’ then-chairman Deanna Oppenheimer.
A new chairman, Alison Platt and chief executive Dan Olley, have recently been drafted in to put Hargreaves on a more even keel but the bid may underscore the need for a larger reset.
According to Citi’s analysis, spending time under private ownership would make it easier for Hargreaves to do a “fee reset” and give more time to invest in its IT infrastructure.
They point to Nordnet, the Nordic version of Hargreaves, which was taken private by Hargreaves’ co-bidder Nordic Capital in 2017 and underwent a successful overhaul.
But what would the loss of Hargreaves, a bastion of retail share ownership and great British success story, mean for the London Stock Exchange at large?
With nearly two million customers, it is one of the primary ways that normal people interact with the City. Would going private deprive the public of an important barometer for retail share investment?
“It would be a shame if it went [private],” says one City analyst. “It’s been one of the longest listed stocks in the financial sector as a whole and it’s the market leader in day-to-day investing.
“The brand recognition is pretty incredible. Around 50pc new customers generally come in through word of mouth, which tells you how strong that is.”
According to Investec, the price being offered is too cheap compared to its potential.
The bid is worth only 2.9pc of Hargreaves’ assets under administration, and the group is trading much more cheaply than rivals such as AJ Bell and Integrafin, analysts at the broker say.
Aside from its importance to City investors, Hargreaves has also carved out a niche as an important cog in how normal people interact with the stock market.
As people get older and need to look after their money more closely, that makes it even more important, says Shore Capital analyst Vivek Raja.
“It’s not systemically important like the banks but it is important in terms of what is important to the health of the economy and the consumer,” he says.
“There’s more of a burden on individuals to plan properly for their retirement and savings so having this sort of business more under the policymakers’ gaze is important.”
The consortium has until June 19 to make a formal bid or walk away for six months. For Hargreaves, everything is on the line.
