The share trading goldmine is a mirage, as Revolut will soon discover

By Oliver Smith on 2nd August 2019

Fintech

Some home truths from Hargreaves Lansdown.

The share trading goldmine is a mirage, as Revolut will soon discover
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In February 2018 Revolut made a stark announcement which raised eyebrows among the fintech and VC community across Europe.

We’ve broken even.”

The reason? Revolut had launched crypto trading just months earlier, much to the delight of the crypto bull market in late 2017.

Revolut’s profitability didn’t last long, the company never made mention of it again.

This week Revolut launched another trading product, this time capitalising on the growing interest in commission-free share trading pioneered by Robinhood in the US and Freetrade in the UK.

In the coming weeks, Revolut’s reported 6m+ customers will be given access to trading some 300+ US stocks and shares, at a time when the hype around companies like Tesla and Apple is riding at an all-time high.

Maybe they’re hoping for another bull market bounce?

In the near term that might be so, buoyed by a wave of trading excitement, sadly in the longer term both Revolut and Freetrade might be disappointed to discover their share trading goldmine is a mirage.

Lessons from Lansdown

Let’s take a look at one of the UK’s most successful “share trading” businesses, Hargreaves Lansdown.

Ignoring their recent fund faux pas with Mr Woodford, Hargreaves remains one of the UK’s largest and most successful direct-to-consumer stockbrokers.

Freetrade CEO Adam Dodds described Hargreaves as “a complementary brand… the Lexus to our Toyota” when speaking to AltFi about the businesses earlier this year.

The reality is that right now Hargreaves and Freetrade/Revolut aren’t just different makes or models of car, they’re entirely different methods of transport.

According to its latest financial results, Hargreaves made just 17.8% of its £236.4m turnover in the six months to December 2018 from share trading.

Yes, one of the UK’s most successful, best known and hardly the cheapest share trading platforms (at up to £11.95/trade) made just £42.1m from charging those expensive fees.

And that’s ignoring Hargreaves’ “Other Costs”, which include the price it pays to execute these trades, along with some other costs like legal and professional services, which currently sit at £23.5m.

Not quite a slam dunk for Freetrade and Revolut’s plan to let most of their customers trade for near-free, even if they manage to build a more efficient and cost-effective trading platform.

“Launching free share trading is great, but the obvious question is how do you actually make money from it,” as Peel Hunt analyst Stuart Duncan pointed out to AltFi.

Winning in wealth

So, where does Hargreaves make the bulk of its money? Wealth management.

More specifically the percentage it charges on the £47.2bn worth of funds, not shares, being held by the majority Hargreaves customers (55% of its total assets under administration sit in these funds).

That’s all to say that, the business of “share trading” is a kind of misnomer, a mirage.

The real money is being made from those winning in wealth management, charging a percentage on billions in assets under management.

“It would be stupid to disregard [Revolut and Freetrade], but they’ll now have to win over individuals with all kinds of combinations of funds, SIPPS and ISAs,” said Duncan.

And both Revolut and Freetrade have a long way to go before they start winning in wealth.

Comments

Calmac

02 Aug 2019 01:04pm

Knowing that they won't give any private crypto keys to customers is worrying, total joke! No keys, not your crypto....