Billionaire Peter Hargreaves’s attack this week on Hargreaves Lansdown, the funds supermarket he co-founded, has not only raised awkward questions about the company’s strategy.
It also highlighted concerns about a key development in the retail investment market — the expansion of low-cost financial advice to savers with too little money to benefit from full-blown personalised financial advice.
Regulators, led by the Financial Conduct Authority (FCA), see this advice gap as a big hole in the services UK financial companies offer the less well-off and are pressing for action. So it was little surprise last year that Hargreaves Lansdown, the country’s largest platform for do-it-yourself (unadvised) investors, joined companies stepping into the breach and announced plans for a low-cost advice service.
Now Peter Hargreaves’s decision to condemn this programme as “completely unnecessary” and “irrelevant” has put pressure on the company, where he remains the largest shareholder with just under 20 per cent.
By extension, it fuels doubts about the general viability of finding ways to give advice that is personalised enough to be useful without consuming so much time that it cannot be profitable.
Some providers see automated advice as the answer, as a low-cost replacement for or supplement to human advisers, but critics warn that this approach is also fraught with challenges.
Peter Hargreaves is concerned that automated advice could end up leading customers into investments that are far riskier than they actually want or need.
“The board indulged in completely unnecessary irrelevant programmes, which have distracted the firm from its prime objective. It’s hardly surprising the shares have collapsed,” he told the Financial Times this week. HL stock is down a third over the past year, to just above £9.
There are also regulatory challenges. While the FCA broadly supports the drive to lower-cost advice, the devil will be in the detail — it imposed rules a decade ago to distinguish between (general) financial guidance and (more specific) advice, in order to try to curb mis-selling.
This tricky-to-define line has prevented many financial companies from offering help in case they veer into advice — something that only higher-cost professionals with the right training and experience are qualified to provide.
The FCA is in the process of consulting on plans for financial advice to become more accessible, making it easier for companies to advise on simple investments within Isas. The watchdog has found that some 4.2mn people in the UK held more than £10,000 in cash.
Hargreaves Lansdown insists that regardless of the outcome of the FCA’s consultation, it will push ahead with plans to launch its automated advice service. The site is the oldest execution-only investment supermarket in the UK, established by Peter Hargreaves and Stephen Lansdown in 1981.
It already has advisers offering “restricted” advice, meaning they can only recommend certain products, a service used more by wealthier clients.
The new advice service will involve giving customers personalised “nudges” or notifications on their phone with prompts to invest, or to hold more cash in a rainy-day fund, among other tips.
The move would set Hargreaves apart from its rivals, including AJ Bell and Interactive Investor, which remain execution-only. Other low-cost entrants have popped up in recent years offering cheaper advice than the face-to-face support traditionally offered by wealth managers to richer clients, with charges running to around 2 per cent of the portfolio value per year.
New companies include, for example Netwealth, where automated advice is supplemented by personal services, for which extra fees are charged. Netwealth said its total cost, including annual advice, is 1 per cent.
Established wealth groups have also developed lower-cost offerings: for instance the Bestinvest operation run by Evelyn Partners, which combines a basic execution-only service with options to request fee-based advice.
Nathan Long, a senior analyst at Hargreaves Lansdown, explains why the company is going down this route. “If we can get more information from clients, we are better able to empower their decision making. For example, the amount of cash someone should hold for a rainy day; this data can tell us their expenditure so we’ll be able to provide a range.”
The cost of building the new service — included in a five-year £175mn technology investment plan — has raised questions in the City. Justin Bates, head of UK research at Canaccord Genuity, said: “It seemed to come as a big surprise, this £175mn of exceptional spend. Certainly the quantum came as a big surprise [to shareholders and customers].”
Charles Bendit, an analyst at Redburn, said: “It’s not obvious how the final proposition of hybrid advice is going to look . . . their ability to do this service is being constrained by regulation, so there is uncertainty around whether automated prompts are really going to drive new inflows on to the platform. There is some scepticism about that.”
Still, other analysts have lauded Hargreaves Lansdown. Rae Maile, an analyst at Panmure Gordon, said: “There is a huge gap and need for advice. People don’t know where to find it, or what it will cost. In an age where things are more complicated, in terms of financial products, tax allowances — is there a need for advice? Absolutely.”