By Daniel Lanyon on Wednesday 23 February 2022
The UK’s largest direct to consumer investment house can still thrive in the digital era but budding competition from once scrappy startups is now a real threat to its business.
Hargreaves Lansdown’s CEO Chris Hill once said the Bristol-based retail investment house was in many ways “the original fintech company”.
It’s true that the firm helped revolutionise how investors accessed stocks and funds by harnessing the power of the internet in the early 2000s and becoming the UK’s best known ‘fund supermarket’.
It is now, however, facing a new threat of digital disruption and competition from fast-growing fintech startups and its own shareholders seem to be getting nervous.
True, the company reported yesterday it held £141.2bn of assets (at the end of 2021), a 4 per cent increase in six months, and much higher than its fintech competitors in absolute terms. It won 48,000 net new clients in the same period, taking its total client base to 1.7 million with a retention rate of 92.7 per cent. It also holds an incredible 43.3 per cent share of the UK direct to consumer wealth market overall.
But when news broke yesterday that it would be cutting its dividend until at least 2024 in favour of a £175m cash injection into its digital strategy investors voted with their feet. Its stock price fell nearly 20 per cent at one point during the day before closing 15.53 per cent lower.
Hargreaves like many incumbents in the financial sector is increasingly seeing a budding threat from nimble competitors that have embedded digital innovation from their early beginnings. Fintechs have much on their side. Backed by a growing stack of venture capital they can more easily invest in growth.
Look at the stellar growth of Freetrade or Bitpanda, for example, which now have millions of users across Europe in less than five years of operations. The latter started in crypto before a snappy pivot to offer stocks and ETFs.
In addition, in the war for talent amid the 'great resignation', there is a deeper issue: finding and retaining developer and software talent. Disruptors too do better. Software lies at the heart of HL's challenge to re-invent its business for the digital era and finding not only the right people, but 'the best' is very difficult and expensive. A recent job advert for a senior developer at Coinbase came with a salary just shy of $1m annually, including stock options.
Central to a five-year strategy for HL unveiled by Hill yesterday is the investment in more ‘digital capabilities’, nicely paraphrased to “automating the hell out of everything”.
This will include a major project to transfer customer data to the cloud, as many large banks are also now doing, following in the footsteps of neobanks and wealth platforms such as Monzo and Starling.
Hill says this plan will reduce costs to service, increase innovation, reduce errors and the risk of downtime while also Increasing efficiency and client retention.
“HL does not stand still. It is just not in our nature, because developing at speed is essential for any market-leading business in a market that is also changing rapidly,” Hill said in his statement accompanying its results.
I confess to actually being a reasonably happy customer of HL. I have both an ISA and SIPP account, the latter meaning that it is where most of my investment assets go. It has an unparalleled selection of funds,ETFs, investment trusts and stocks and good customer service in the event you need to speak to someone.
But the overall digital interface, as well as the broader customer experience, leaves a lot to be desired. The fees too look increasingly uncompetitive when stacked up against Freetrade, Bitpanda, Revolut or LIghtyear. I was also recently informed - by post - that unless I opt-out new pension contributions would automatically be allocated to an in-house managed fund, which didn’t feel either innovative or a way to win over customers.
The ‘digital wealth’ category of fintech- whose first iteration was robo advisers such as Nutmeg and Scalable Capital - was first derided by an incumbent wealth management industry as interesting but ultimately unsustainable. The cost of customer acquisition was too high and ultimately never going to scale.
In 2022, though, it looks increasingly confident, cash generative and quicker to embed new services and digital expectations than incumbents.
It has also never been easier for another incumbent, fintech in another category such as a neobank or new startup to launch investment services thanks to a host of disruption in the B2B infrastructure space.
In five years, Hargreaves Lansdown’s digital plan may well deliver for shareholders and help it retain its dominance. But it’s going to be a tough road to keep the competitors at bay. We are certainly at an inflexion point.
Daniel Lanyon is editor-in-chief of AltFi.