How to mend Hargreaves Lansdown

Posted by Robin Powell on August 19, 2019

 

Hargreaves Lansdown is a Goliath of the UK investing industry. But its integral role in the Neil Woodford scandal has put it in the spotlight. I wrote four years ago about how HL is built on a lie and how it needed a new business model. Its need is even greater now. In this article for Money Marketing, I set out some of the changes I believe are necessary if the company is to regain the public’s trust.

 

If it ain’t broke, the old adage goes, don’t fix it. And on the face of it, there’s nothing much wrong with Hargreaves Lansdown as a business. HL has just just announced that assets under administration have broken through the £100bn mark. In the year to the end of July, net revenue rose 7% to £480.5m while pre-tax profit increased by 5% to £305.8m.

But the headline figures mask a much less rosy picture. Hargreaves, rightly, has become synonymous with the spectacular demise of Neil Woodford, whose flagship fund it promoted up until the day it was gated.

With nearly 300,000 Hargreaves Lansdown exposed to Woodford, revelations that senior figures cashed in HL shares days before the crisis came to light have not gone down well. Nor has the fact that chief executive Chris Hill waited until the 11th hour — the eve of the latest results announcement — to say that he and his colleagues would forgo their generous bonuses.

 

The writing is on the wall

Hargreaves Lansdown is just like the rest of the UK investing industry: much as it would like things to stay as they are, it surely knows the writing is on the wall and it has to change. Otherwise it will gradually lose the market dominance it currently enjoys.

For me, that change can only happen when it stops denying that its old, vastly lucrative business model was built on a lie. Although Hargreaves has always been at pains to stress that its best buy lists should not be seen as advice, the strong impression customers are given is that the funds they feature are best in class. They clearly aren’t. Woodford Equity Income is an extreme example, but over the years HL has quietly dropped scores of funds it once recommended.

 

An almost impossible task

The truth is that picking outperforming funds ex ante is all but impossible. To quote Charley Ellis, “extensive, undeniable data show that identifying in advance any one particular investment manager who will, after costs, taxes and fees, achieve the Holy Grail of beating the market is highly improbable.”

Hargreaves Lansdown isn’t the only offender here. Investors want to believe that someone can pick the winners. Fund managers, investment consultants, brokers, ratings agencies and many media outlets are financially incentivised not to disabuse them of this misconception. But it’s time HL came clean.

 

Fund lists need to help, not hinder

I’m not saying that fund lists have to go. They just need to be more useful. They have to include low-cost index funds and be much more focused on cost. Research by Morningstar shows that cost is the most accurate predictor of future performance; in other words, the less you pay, the higher your net returns are likely to be. Why can’t Hargreaves produce a list of the cheapest funds? And how about a list of funds that are totally transparent about their fees and charges?

Historically, Hargreaves Lansdown has used its commercial muscle to drive down the price of actively managed funds. It has to continue doing so. There’s nothing wrong with active management in principle — it’s really just the cost that’s the problem — and Hargreaves has an important part to play in making it better value.

There is, finally, another way too in which it can bring its influence to bear. As organisations like ShareAction and the AMNT has shown, fund managers are not taking ESG issues as seriously as most investors would like them to. Hargreaves is uniquely well placed to encourage a shift in emphasis.

There’s plenty of opprobrium being directed by journalists at Hargreaves Lansdown just at the moment, and it’s certainly not undeserved. This particular journalist has never been a fan, but he does hold out hope that HL can and will mend its ways.

 

Picture: Hargreaves Lansdown’s headquarters in Bristol

 

 

 

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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