Hargreaves Lansdown’s hunt for growth

New Hargreaves Lansdown chief executive Chris Hill is determined to show the FCA what good value and service are as he sets out plans for the “evolution” of the business.

In his first interview since taking charge in April, Hill talks about “the buzz” of scoring the firms’ one-millionth client at a time of low confidence and fresh complexity in the savings and investment world.

Hill explains how Hargreaves is responding to regulatory scrutiny over costs and competition, outlining his approach to managing conflicts of interest.

He also discusses the role of advice and gives an update on Hargreaves’ new savings business and the part it will play in the firm’s growth.

Direct-to-consumer dominance

Hargreaves Lansdown is by far the largest player in the UK direct-to-consumer investment market. It has nearly £80bn assets under administration and reached one million clients this month.

But despite its market dominance, analysts have argued the looming threat from the likes of fund giant Vanguard and ramped-up efforts by the FCA to protect the mass-market investor could pose challenges for Hargreaves’ model.

But 46-year-old Hill does not seem concerned. He says some of the “unprecedented” level of regulation in financial services is not translating into real benefits for consumers.

He says: “I would prefer regulations to have more of a strategic approach. There are deep problems like the advice gap, the guidance and advice difference, and there are a lot of people who will need help but the regulator is preventing us from doing so because you get into that old advice debate.”

Hill cites the Financial Advice Market Review and says it hasn’t worked for the industry. “Ultimately if you want to access people and help them you can’t do it straight through the advice route,” Hill says.

Crunch time for costs

On the FCA’s most recent work, including its reviews into competition in the asset management and platform markets, Hill says the regulator is right to look at value for money, but he challenges some of the issues raised, such as an emphasis on the pure cost of advice.

He says the FCA itself has realised it is not all about cost for consumers and has recognised “the journey” that clients go on.

Throughout the process, potential customers will be faced with a variety of fees, such as platform, fund and the advice fees.

Hill says: “I do think that cost is coming down over time and what it is going to focus on is where consumers perceive they are getting value for the money they are spending.

“But you can’t come up with one size fits all. Depending on people’s level of financial confidence and sophistication, they may want to have execution-only, and they probably want to have the full-on advice. Consumers should be able to choose quite seamlessly from when and where.”

Hill says a third of Hargreaves’ customers will pay for advice, but only a one-off advice fee as they won’t usually choose to have an ongoing advice service.

He says: “I listen to the calls at the pensions help desk to see how much advice customers need and with the help of the internet you see that they have reached a level of knowledge but their level of confidence needs help to cross that line.

“But do you need that help constantly every year and be paying 1 per cent? That is down to the consumer rather than someone like me. If you are getting value for money that is OK but if you are not getting something done for you why would you pay?”

Finding value

The FCA has received feedback from firms on its platform market study which will look into competition, price transparency and potential conflicts of interests in some business models. As the boss of one of the companies that would inevitably be in the spotlight of the FCA review, Hill defends the ways Hargreaves provides value for its clients.

He says he has sent back a “huge document” in response to the detailed questionnaire the FCA sent to firms to inform the bulk of its platform review.

Hill says: “What we put in all our answers is the value and service we deliver from a client perspective and that is a fundamental thing. This business is the most client-centric business I have ever worked for, partly helped by the fact that most of the people in the business are clients too.

“I really want the regulator to understand what good value and good service is because in that way they will have the best and most educated context to make any choices that they want to make.”

Expert view

Hargreaves Lansdown is a business we hold in very high regard. It has successfully built a dominant market leadership position, incredibly by spending relatively little on advertising and marketing. For example, in the financial year 2017, the group spent just over £14m on marketing and distribution costs, attracting 118,000 new Vantage customers, taking the total to 945,000. As of November 2017, it has reached a million clients.

In contrast, Chris Hill’s former employer IG Group spent almost £65m acquiring a similar number of new customers.

The two businesses are different but increasingly other financial service providers are encroaching on Hargreaves’ territory. The launch of Vanguard’s direct platform in the UK and the newly capitalised Interactive Investor, backed by JC Flowers, is likely to place increasing pressure on new business flows.

In addition, the FCA’s platform review could place further regulatory constraints on the business, as witnessed recently by the need to boost capital and thus reduce the dividend payout.

Having said all that, 2017 looks set to be a record year for net retail flows so the next set of results should be good. However, the increased competitive and regulatory risks means we think Hargreaves will find the outlook more testing and command a lower rating than has historically been the case. In summary, we think it is a good business but facing several headwinds and thus overvalued.

Justin Bates is equity research analyst at Liberum

On the matter of costs, Hill says Hargreaves’ clients want to see a single charge as the FCA has suggested, but the company will still provide a breakdown of costs.

Hargreaves has faced questions recently over whether the funds on its best buy lists are value for money. Hill says he also explained to the FCA what it takes for a fund to be in Hargreaves’ Wealth 150 list.

The list has narrowed to 51 funds since 2003, when it had more than 150 funds. Hill says the number has shrunk over time because the number of outperforming funds available to customers did as well.

Given its distribution power, Hill says the business can also negotiate discounts with asset managers on funds, but he does not go into further detail on how and on which it does so or how these are passed on to customers. He says: “The FCA has the empirical data on these funds and realised how strong the list is. They have got also a wealth of client data that shows what the clients want and how they make their choices. In terms of value, the Wealth 150 has performance and has low fees.”

Too much ownership?

In both its asset management market interim study and in the terms of reference for the platform market study, the FCA highlighted the risks of “distorting competition” posed by a vertically integrated firm such as Hargreaves.

The Bristol-based company offers advice, a platform, its own multi-manager range and in-house funds. Hill acknowledges Hargreaves is a vertically integrated firm and that potential conflicts need to be made clear to consumers.

He says: “One has to acknowledge those conflicts and deal with them. For example, when we are marketing our multi-manager funds we always put them alongside other funds that will look at achieving the same.

“You have to look through these conflicts of interest and make sure you are presenting them to clients. We also have various procedures we go through on how we invest in those funds, how we think about them
and you have to do that in order to make it clear what the right thing
for clients is.”

Planning for the future

Hill, who took over from Ian Gorham earlier this year as chief executive, says the fundamentals of Hargreaves are not going to change with his tenure.

He says: “This business is so focused on clients at a time when things for them are getting so complicated and difficult for them. And that is what this business was set up to do; make sure that people save and invest with confidence.

“When I look at what this business does and how it is evolving and what we are doing to develop that, you certainly have a spring in your step and then you realise you are doing that for a million people now.”

Hill joined Hargreaves in February 2016 as chief financial officer from IG Group. His career also includes leadership roles at Travelex, General Electric and Arthur Andersen.

After joining Hargreaves, Hill worked with Gorham on the strategy for the firm but when the former chief executive stepped down there was no sudden change in direction.

It is much more about evolution so the challenge for this business is to go into that next stage of growth

“We only stopped doing a couple of things, like launching a peer-to-peer platform,” Hill says.

He adds: “The things we are doing now were things we were already planning to do beforehand. The things in this business area are much more about evolution so the challenge for this business is to go into that next stage of growth.”

A long-awaited new active savings account at the company is “on course” says Hill. He is also not excluding the use of artificial intelligence to work on customers’ data and improve service in the future.

Hill says the active savings account will be ready by the end of 2017, but it will be rolled out to selected clients first before a soft launch early next year.

At first, the service will have a “relatively” simple cash management tool, which will be followed by a cash Isa.

Hill says: “The savings business is nearly ready to go. Developing the technology has been a huge challenge but that’s progressing really well. There are actually three platforms that we had to build. One of them is the platform for the banks, the second is the clients’ platform, which is the part of the Vantage platform and the third one is the back-office administrative one.

“That is the complexity of it and some of it proved more challenging than others, as you need to work with some of the banking partners making sure the technology can fit.”

Hill has got “many more ideas” on how to evolve the service but remains tight-lipped about it.

Reflecting on the potential for future growth, Hill says there are still six million potential clients that could look towards Hargreaves for their savings.

He says: “It has been a great business with Peter [Hargreaves] and Steve [Lansdown] starting it up…Then it got listed, then me and Ian ran it for seven years and then it became an established part of the FTSE 100 and for me the challenge was then for the people to actually see the potential that we could go on to do. When you look at the market we serve, there are about seven million people in it and we have a million of them. Our contact list has got about two-and-a-half million so conversion is not bad.

“There are more people out there that could use our service so the challenge is to evolve these services in such a way that they appeal and deliver in the way we already do so we are able to continue to grow.”

Hill is confident he can meet the challenge of new competitors like Vanguard. He says: “Vanguard is big in the US. They are relatively small in the UK.”