New world order: Have Hargreaves and SJP had their day in the sun?


Wealth management giants Hargreaves Lansdown and St James’s Place are said to be under threat as the pressures of a changing investment market and a tough regulator are brought to bear.

Analysts suggest the Hargreaves model is particularly at risk, with financial services industry growth likely to plateau, the looming threat from the likes of Vanguard and ramped-up efforts by the FCA to protect the mass-market investor.

Perhaps controversially, analysts also point to advice-led models being better positioned for the financial services market of the future.

Money Marketing examines the outlook for the two organisations, the power brands that may yet overtake them, and the factors set to drive distribution in the years ahead.

Their day in the sun

Money Marketing has obtained an analysts’ note from investment research firm Exane BNP Paribas which raises concerns about where growth in the financial services industry will come from in the next few years.

Co-authors Gregory Simpson and Arnaud Giblat argue “UK wealth managers have had their day in the sun”, saying while Hargreaves and SJP have consistently delivered high net flows, they may not continue to have a dominant hold on market share.

The authors say: “Previous growth drivers – demographics and regulation – may now shift the market in new directions and the winners of old may not necessarily be the winners of the future.”

The analysts say the number of people aged 65 and over in the UK is set to outpace the 45-64 demographic, the age at which the amount of wealth peaks.

Simpson and Giblat state: “Given the average age of a client is around 50 at Hargreaves and around 56 for SJP, it suggests both companies have already been benefiting from being in the ‘sweet spot’ for asset gathering.


“While estimates of total financial wealth remain positive, it appears 2014-17 may represent a plateau for growth as population growth shifts towards early-stage accumulators and retirees who start depleting their financial assets as they enter old age.”

The analysts point to Japan, where retail assets in pension funds have grown only modestly over the past 15 years, which they suggest coincides with the number of 45-64 year-olds  starting to shrink.

Separately, the analysts argue both Hargreaves and SJP have gained market share in different ways as a result of the RDR.

They add: “While we do not expect these positive dynamics to materially change in the near term, we also think the major catalysts for further market share growth are now behind us for both players.”

But Cazalet Consulting chief executive Ned Cazalet thinks differently. He says from both a population and pension policy perspective, there is enough going on to sustain the market.

He says: “I have been giving speeches for 30 years on demographics and the impact on markets. The premise of this note is there is going to be a decline in assets, but I’m not sure I quite believe that. In the near term you have the impact of pension freedoms, which is clearly leading to much more activity than before in the decumulation space. People might be taking out their money as cash, or investing in drawdown, or cash withdrawals might end up being invested somewhere else. Those assets are not disappearing.”

An ongoing need for advice

Simpson and Giblat suggest that rather than an inevitable growth in direct-to-consumer, the market is shifting instead to a demand for ongoing advice. They say barriers to entry make SJP better positioned for growth, as well as the wealth manager running a model that can retain assets across the generations and provide support in a changing environment, such as changes to pension tax relief.


They say: “We are not bullish on further growth of non-advised businesses and think the channel of workplace pensions/Isas could be a competitive threat.

“SJP should be better placed to capture individuals with large workplace pension pots seeking to consolidate assets, as this decision is more likely to need advice. This is supported by the Government increasing the capability to pass on pension pots through inheritance, which gives further support for financial planning rather than the market shifting further towards DIY investing.”

But EY senior adviser Malcolm Kerr disagrees. He says we cannot ignore the fact younger investors will turn to online propositions first, though says this should not present a threat to traditional face-to-face advice.

Kerr says: “The demand for face-to-face advice already outstrips supply. Over time it seems absolutely obvious more people are going to buy investments without any kind of face-to-face interaction. But that does not mean the demand for what advisers are offering is under any threat. Buying an investment online is not the same as the service offered by an adviser.

“Younger people are used to doing everything online, whether it is dating, banking or gambling. Over time, when they have got money to invest, they’re going to look first to an online solution. Organisations that meet that need will come out on top.”

The Vanguard threat

As Money Marketing revealed earlier this month, new players are eyeing up Hargreaves’ market share for themselves – in particular Vanguard with the upcoming launch of its D2C offering.

The analysts point out Vanguard has grown to a market share of about 18 per cent in the US in the space of 15 years.

They say: “While clearly this is not a tangible threat yet, we do not think the potential threat should be underestimated by investors given Vanguard’s traction in the US.”


Gbi2 managing director Graham Bentley suggests the “Vanguard effect” may be compounded as investors head into a low growth, low returns environment, which will focus their minds more on the cost of their investments.

He says: “At a time when returns are eaten by charges, if Vanguard can come in at 20 basis points and with a price that is ‘all in’, then you can see how people might find that quite persuasive, and that they might start saying ‘I don’t need advice’.”

Markets and cost competition will not be the only factors bearing down on models such as Hargreaves’.

The asset management industry is awaiting the outcome of the FCA’s ongoing competition review, and again, Simpson and Giblat suggest Hargreaves may have more to lose here.

They point to Hargreaves promoting its own multi-manager funds through its platform and question whether the regulator will see this as being in the client’s best interest.

They add: “[For Hargreaves] there is more of a mass market skew which means we see [the firm] being more at risk from FCA initiatives to protect the small investor.”

The positive spin

But the analysts are not all doom and gloom. They identify that SJP has taken a hit to cash earnings in recent years thanks to its 2014 acquisition of Asian-based advice firm the Henley Group, the cost of its Financial Services Compensation Scheme levy, and its replatforming to IFDS.


However, they believe these costs are set to fall relative to funds under management.

SJP chief executive David Bellamy says: “As we continue to grow our advisory presence we look to build strong advocacy with and through our existing clients and advisers, in the strong belief that if we maintain our focus on doing this well, we will continue to attract advisers, acquire new clients and grow our client funds under management.”

Meanwhile despite their gloomy outlook, the analysts also see opportunities for Hargreaves, such as the introduction of the Lifetime Isa, growth in pension assets, and the launch of its cash savings service.

Hargreaves Lansdown chief executive Ian Gorham says: “Hargreaves Lansdown is in prime position to benefit from the structural changes to the savings and investing markets, which include the launch of the Lifetime Isa next year and the growth in the corporate market.

“Savers and investors benefit hugely from healthy and competitive markets. New services such as HL Savings will help widen the market by helping more people to make more of their money. Compared to the US, direct investing is relatively small in the UK so there is a huge growth potential.”

Looking beyond the two companies, Cazalet tips Vanguard for the reasons mentioned above. He also points to Standard Life as a firm that has invested time in building a sustainable model, particularly through its retirement Expert Centre. He also suggests Fidelity has been on a “slow and steady march” in building a brand in the retirement space and that Aegon has also made clever acquisitions through its Cofunds and BlackRock defined contribution platform deals.

Cazalet says: “The market opportunity is huge. There is demand for advice, and with longevity people will need help managing their assets for 20 to 30 years. The challenge is how you give a service, whether that is guidance or advice, on an ongoing basis. Then there is the question of how that service is delivered.”

Kerr believes there are good prospects for the advice sector of the future, with both baby boomers and the new wave of inherited wealth and DC pensions coming through.

But he adds: “New players are not going to come in overnight. There is no real brand in the advice and retirement space. If household brands were to come in like Google and Amazon, that could change the landscape quite quickly, but that will require huge investment. Brands are put off because it is so heavily regulated. If you are a global brand and you wanted to launch into financial services, you’d probably pick an easier market than the UK.”

Bentley argues regardless of their business model, firms will need to evolve to cope with a changing environment.

He says: “What the analysts are highlighting is there is a recognition here about the kind of landscape these businesses are going to operate in. The old-fashioned way of building a business, when a firm comes in to provide a product and advice and takes a basis point charge for doing so, is money for old rope. It is not sustainable. All the businesses that have grown up during that era will have to adapt. Either that, or they will find themselves looking at a ‘Kodak’ situation, where they are overtaken by events.”

Expert view: Jeremy Fawcett


Many expected the RDR to knock the likes of Hargreaves Lansdown and St James’s Place off their perches, but in reality both have been able to move up a gear since 2012. For both, the pension reforms were an unexpected boost to their future prospects, with client assets set to remain on-platform through retirement.

For SJP that is in the form of more people seeking advice around increasingly complicated retirement planning. For Hargreaves, it is the ongoing empowerment of the digital consumer nudging more people to manage their own affairs.

Hargreaves and SJP will not be the only companies to benefit from these shifts – the rising tide will lift many boats and we do not expect to see a dominant single “business model”. However, when investors are considering a service to use, what is most important to them is a well-known and trusted company name, and this is where Hargreaves and SJP are leaders in their respective markets.

Across a broad sample of investors, Platforum research shows prompted brand awareness for Hargreaves at 30 per cent and SJP at 20 per cent. While direct distribution from the likes of Vanguard and new entrants like Nutmeg are likely to increase, their brands are less well recognised at 14 per cent for Vanguard and 8 per cent for Nutmeg.

We do not believe Hargreaves’ business is threatened by pension freedoms and an ageing population. Hargreaves says it earns more from a client after four years in drawdown than it would have taken as a one-time annuity commission. It also says Corporate Vantage, its workplace proposition, has grown by 36 per cent in the past year. While we do not know who would win in a head-to-head game of hungry hippos between Hargreaves and SJP, the market is far from being a zero sum game.

Jeremy Fawcett is head of direct at Platforum