Hargreaves needs a rethink. Its business model is broken

Posted by Robin Powell on September 21, 2015

Hargreaves needs a rethink. Its business model is broken

 

Hargreaves Lansdown is one of the biggest success stories in Britain’s financial services industry. What started as a DIY investment supermarket is also now a robo-adviser, fund manager and pension platform, and it’s just announced plans to add peer-to-peer business lending to its rapidly expanding range of services.

The Bristol-based firm, which last year generated £358 million in income, has earned a fortune for its founders and continues to provide reasonable returns for its shareholders. But what about Hargreaves Lansdown customers? How have they been faring?

On the face of it, they’ve done OK. The company was founded in 1981 and, notwithstanding the crash of 1987, the next two decades saw stellar gains for UK equities and indeed for most of the major stock markets. The 21st century has not been especially kind to investors thus far but, assuming they’ve stayed the course, Hargreaves customers won’t be too unhappy with how their investments have performed. The company has also enjoyed relatively high levels of customer satisfaction.

But dig beneath the surface and a rather different picture emerges. Hargreaves rose to prominence mainly by cutting deals with high-profile and high-fee actively managed funds, using its market share to negotiate discounts for its customers. It has also had, from the outset, a fairly aggressive PR and marketing strategy. It knows that newspapers and their readers can’t get enough of the “star” managers who run the funds that Hargreaves likes to sell, and it’s always very happy to provide an appropriate comment.

The problem is that Hargreaves Lansdown is peddling a myth; that the way to success as an investor is to chase performance, the latest hot region, sector or asset class, or the stockpicking genius who it seems can do no wrong. It makes it all appear so easy as well, the impression given that all you need to do is select a few funds from the list it’s helpfully compiled for you and you should do very nicely.

 

broken

 

The overwhelming evidence is that all of those assumptions are complete and utter poppycock. Only around 1% of active funds consistently beat the market and they’re almost impossible to identify in advance. Past performance is no guide to future performance and, if anything, lists of recommended funds are more of a hindrance to investors than a help.

Most important of all, what companies like Hargreaves Lansdown fail to spell out is quite how much it costs to invest in active funds. The long-term, compounded costs are staggeringly huge. What’s more, as if to add insult to injury, Hargreaves’ charges are even higher than the industry average. A few extra basis points here and there might not seem like a great deal, but over time those marginal differences add up to very significant sums.

The good news is that, slowly but surely, investing is changing. The UK is still far behind the US in this respect, but awareness is growing among investors, journalists and regulators that, far from a being positive benefit, active fund management generally extracts value from the investment process. All over the world we’re seeing the growth of companies like Betterment, Wealthfront, Dimensional Fund Advisors and, most famous of all, Vanguard; companies which have acknowledged and embraced the evidence and built their businesses on it; that provide consumers with what they really need rather than what generates the biggest profits.

To be fair, Hargreaves was about the only major UK investment company willing to engage me in discussion when How to Win the Loser’s Game was released. For that at least it has my respect. But the evidence against active fund management for the average investor is so persuasive that there are only two explanations as to why firms should continue to promote it so brazenly — either they haven’t read the evidence or they’ve decided that rebuilding their business model to reflect that evidence is, commercially speaking, too big a sacrifice to make.

Of course Hargreaves does offer low-cost passive funds, but as far as I can make out it doesn’t go out of its way to promote them. Instead it directs customers to the funds that contribute most to its profits, its own multi-manager funds. It’s these funds, which layer fees on top of fees, that are usually the most expensive of all.

Like another company I wrote about recently — St James’s Place Wealth Management — Hargreaves commands such a significant market share that it has the potential to be, like Vanguard, a real consumer champion. It could become, if it wanted to, a major force for good in UK investing, and play a crucial part in tackling the savings and pensions crisis this country faces. Granted, such a move would probably meet with initial resistance from its shareholders but, as Vanguard has proved spectacularly, the best strategy in the the long run is to do what’s right for the consumer.

Over to you, Hargreaves Lansdown. It’s time to change direction. Alas, I fear I know which one you’re planning to take.

 

Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.

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