Invest in HL, don't invest with HL

Plus

I came across a nice quote from Nick Train:

Aside from four property companies and investment services group 3iii – all of which the manager says are highly-leveraged and potentially include disposal of profits in their numbers, he says Hargreaves Lansdown is the most profitable FTSE 100 company based on average three-year operating margins.

“When a trading company with an operating margin of 60 per cent grows, and Hargreaves Lansdown does continue to grow, a great deal of value is created for the owners of the company,” he explained.

“My favourite fact of 2016 is that, five years ago, the total running costs of Hargreaves Lansdown expressed as a percentage of assets under management was 32.5 basis points. Today, five years later, the total running costs of Hargreaves Lansdown expressed as a percentage of its assets under management is 16 basis points.”

“In other words, the cost of running the company has halved over the last five years. That’s a result of assets under management increasing of course, but it’s also a result of the increasing efficiencies the company is deriving from becoming more and more digital. As it digitises, the cost of running itself collapses.”

So that means, of the 0.45% you pay HL in fees, two thirds of it is pure profit.

Time to buy some HL shares? With iWeb, of course.

dunstonh

So that means, of the 0.45% you pay HL in fees, two thirds of it is pure profit.

If that is the case, then why are most platforms unprofitable?

HL are not just a platform. They offer a wide range of financial services. Some will be more profitable than others. If you have someone investing on the HL platform using the HL funds then the fund will be more of a cash cow to HL than than the platform charge.

Also, platform technology dates. The early platforms are already suffering very large bills to get their technology updated. So, the platforms have to prepare for this future technology bill.

So, it is far too simple to equate currently earnings of the overall company against the platform charge.

Pincher

Ian Cowie was saying, Mercury Asset Management would like you to buy their funds, but you can buy shares in Mercury Asset Management instead.

Just waiting to see what Vanguard going retail in the UK will do to charges. Maybe they will all starve soon.

grey_gym_sock

Plus wrote: »

Time to buy some HL shares? With iWeb, of course.

that's where i hold my HL shares (i have trimmed my holding a bit, to use spare CGT allowance.)

though HL can be reasonably priced when you're holding shares (and other exchange-traded investments), rather than open-ended funds. i hold some shares etc in a taxable account with HL ("fund & share account", as they call it), which has no holding charges, just trading charges.

dunstonh wrote: »

If that is the case, then why are most platforms unprofitable?

HL are not just a platform. They offer a wide range of financial services. Some will be more profitable than others. If you have someone investing on the HL platform using the HL funds then the fund will be more of a cash cow to HL than than the platform charge.

true, but the platform is the largest division of HL's business, and it does have margins of roughly 2/3. also pretty consistent margins from year to year. there was a drop when RDR2 came in, since HL's new charging for open-ended funds reduced their margins (and this happened to coincide with lower margins on cash due to falling deposit rates). otherwise, margins have usually risen, due to growth in assets on the platform.

within the platform division, HL have reported on the different rates of revenue for open-ended funds (c. 0.4%), shares etc (c. 0.3% - but variable, depending on level of trading activity), and cash (c. 0.4%-0.5% - variable, depending on deposit rates), but they don't break down costs for those asset categories - they only give costs for the platform as a whole. so you can't say exactly what their margin is on (e.g.) funds.

Also, platform technology dates. The early platforms are already suffering very large bills to get their technology updated. So, the platforms have to prepare for this future technology bill.

HL's technology is in-house, which is something that i think can be a big advantage when it works. (and i'd expect them to have continually increasing costs for IT staff, not a huge bill to a third party.)

it does seem to be working, in that they managed to have full "pensions freedoms" available on day 1, and the same with LISAs, which many providers didn't; and everybody seems to like their website/app. though there have been delays with launching their planned new cash products.

So, it is far too simple to equate currently earnings of the overall company against the platform charge.

yes. however, the combination of the scale of the platform, and having an in-house IT platform which they are able to add new features to - it doesn't look like they'll need to throw it away and start again, which is where your IT costs can really escalate - does seem to be working very well for them.

diversifying their revenue, e.g. by launching more of their own funds, is another factor.

dunstonh

HL's technology is in-house, which is something that i think can be a big advantage when it works. (and i'd expect them to have continually increasing costs for IT staff, not a huge bill to a third party.)

Actually, it is the platforms with the in-house software that are suffering the most. Those using the like of FNZ seem to be avoiding this issue and there is a trend of those who have in-house software of moving to the likes of FNZ.

it does seem to be working, in that they managed to have full "pensions freedoms" available on day 1, and the same with LISAs, which many providers didn't; and everybody seems to like their website/app. though there have been delays with launching their planned new cash products.

No platform was unable to achieve that. Not a surprise though as income drawdown is an area that platforms had been offering for over a decade. The pension freedoms required little change for platforms apart from the provision of phased flexi-access drawdown. That meant adding it as a regular payment option for what had previously been an ad-hoc transaction.

yes. however, the combination of the scale of the platform, and having an in-house IT platform which they are able to add new features to - it doesn't look like they'll need to throw it away and start again, which is where your IT costs can really escalate - does seem to be working very well for them.

That is something we wont know for a while. IIRC, they already changed once (from white label to in-house). So, they missed the early software period which probably means their software is easier to adjust to cater for changes. Sooner or later though there is going to be a requirement for a large infrastructure spend. That is inevitable with IT and is par for the course. So, either you budget for it in advance or then keep putting it off creating a bigger bill for when it eventually happens. Then the bill can be too big for the parent company to swallow. There is no parent company with HL at this time and the platform is core business. So, I expect they are more focused than many other platforms.

Issues ahead include the FCA review into investments and distribution including platforms. That is likely to hit margins as it isnt much of a secret that the FCA wants costs to consumers to fall (although the FCA itself is a key reason for much of the costs).

kidmugsy

dunstonh wrote: »

If that is the case, then why are most platforms unprofitable?

HL are not just a platform. They offer a wide range of financial services. Some will be more profitable than others. If you have someone investing on the HL platform using the HL funds then the fund will be more of a cash cow to HL than than the platform charge.

Also, platform technology dates. The early platforms are already suffering very large bills to get their technology updated. So, the platforms have to prepare for this future technology bill.

So, it is far too simple to equate currently earnings of the overall company against the platform charge.

Oh, must you break the magic spell? The world is full of people who are full of opinions about business, untrammelled by knowledge or any power of reflection.

grey_gym_sock

dunstonh wrote: »

Actually, it is the platforms with the in-house software that are suffering the most. Those using the like of FNZ seem to be avoiding this issue and there is a trend of those who have in-house software of moving to the likes of FNZ.

i'm not suggesting in-house software is always better. to generalize, i'd say that bad in-house software is the worst solution; external is middling; and good in-house is best.

a bad in-house system would be 1 where there is great difficulty making required changes (without breaking something else, or without making the system more byzantine, which makes further changes even harder). this could be due to the software itself, or to the lack of relevant knowledge and skills in the internal IT staff.

OTOH, a good in-house system will make it possible to drive through required changes more rapidly. your IT staff will have some knowledge of your business processes, and can work out precisely what is required with other staff. requesting a new feature from an external software supplier can take longer, and may not give you precisely what you want, and sometimes they just won't do it.

i have no internal knowledge of HL's software, but the way they adding new feature, new apps, etc, gives me the impression that they know what they're doing.

No platform was unable to achieve that. Not a surprise though as income drawdown is an area that platforms had been offering for over a decade. The pension freedoms required little change for platforms apart from the provision of phased flexi-access drawdown. That meant adding it as a regular payment option for what had previously been an ad-hoc transaction.

ok, but lots of DC pensions didn't offer "pension freedoms". maybe the platform did, and that was just the product. (and the product probably didn't offer drawdown previously, either.) the whole thing played very well as publicity for HL, however. does HL give you pension freedoms? yes. does <insert name of any well-known insurance company which does pensions> offer pension freedoms? well, that depends ... it's probably easier to switch to HL than to answer the latter question fully

many aren't offering LISA yet. why not? in any case, it looks like good publicity for HL again.

That is something we wont know for a while. IIRC, they already changed once (from white label to in-house). So, they missed the early software period which probably means their software is easier to adjust to cater for changes. Sooner or later though there is going to be a requirement for a large infrastructure spend. That is inevitable with IT and is par for the course. So, either you budget for it in advance or then keep putting it off creating a bigger bill for when it eventually happens. Then the bill can be too big for the parent company to swallow. There is no parent company with HL at this time and the platform is core business. So, I expect they are more focused than many other platforms.

throwing the old software away and replacing it is not something that should generally happen, IMO (and i do have some experience in IT, BTW - though not in IT for investments platforms). or not for really big components of the software. smaller components may be replaced - especially front-ends (websites, apps). interfaces with other companies' systems may need to be changed. but throwing away really large components is something of an admission of failure - and can to lead to further problems, when you discover that actually lots of business-specific knowledge was embedded in the software, not all of which has been replicated in the replacement.

in general, this is why it's better to have incremental change. and you have more control of this if you are using in-house software.

so i'm not convinced that the absence of some new IT mega-project implies that HL are postponing necessary spending. this is just guess-work, though. i could be wrong.

Issues ahead include the FCA review into investments and distribution including platforms. That is likely to hit margins as it isnt much of a secret that the FCA wants costs to consumers to fall (although the FCA itself is a key reason for much of the costs).

there are always regulatory changes in the offing. IMHO, it doesn't seem very scary to HL, this time. once you tell people how much they're paying for a platform (e.g. HL's 0.45% on funds), and they still don't switch to a cheaper platform, what is the FCA going to do about it? price caps??

some of the FCA's ire seems to be directed at (the price of) active fund management. which HL makes some money in, from their own funds, though that's smaller than their platform business.

i thought the FCA might be keen on allowing more "investment guidance", i.e. something that doesn't quite amount to individual investment advice. partly due to the high cost of the latter (or to many people's unwillingness to pay that price). that seems like something positive to HL. they already have their "readymade portfolios" in this area.

dunstonh

a bad in-house system would be 1 where there is great difficulty making required changes (without breaking something else, or without making the system more byzantine, which makes further changes even harder). this could be due to the software itself, or to the lack of relevant knowledge and skills in the internal IT staff.

Which has plagued insurance companies for many years now with hard coded systems that no longer have the IT people that built them using methods that current IT people cannot understand. The costs get so big to adapt that they cant afford to update old contracts. Large companies do not have the nimble or focused nature of smaller companies.

i have no internal knowledge of HL's software, but the way they adding new feature, new apps, etc, gives me the impression that they know what they're doing.

A good front end can hide a bad back end or vice versa. However, none of us know what it is like or what shelf life it has.

ok, but lots of DC pensions didn't offer "pension freedoms". maybe the platform did, and that was just the product. (and the product probably didn't offer drawdown previously, either.) the whole thing played very well as publicity for HL, however. does HL give you pension freedoms? yes. does <insert name of any well-known insurance company which does pensions> offer pension freedoms? well, that depends ... it's probably easier to switch to HL than to answer the latter question fully

HL dont have legacy products spanning 20-30-40-50 years. So, they do not have the issue insurers have. However, most active insurers own a platform and the platform does offer pension freedoms. There is no more complexity in transferring from one platform/provider to another as most use Origo for the transfers.

many aren't offering LISA yet. why not? in any case, it looks like good publicity for HL again.

LISA is a flawed product. Over complicated, reduced market (due to age). Only allows a small value (so low margin - although when you have a high platform charge like HL, I suppose that isnt an issue) and is at risk of being subject to future mis-sale complaints. Most providers are avoiding for those reasons. When I say flawed, I am not saying that it is not the best option for some people. Just that it wasnt wanted by the industry and wasnt needed.

there are always regulatory changes in the offing. IMHO, it doesn't seem very scary to HL, this time. once you tell people how much they're paying for a platform (e.g. HL's 0.45% on funds), and they still don't switch to a cheaper platform, what is the FCA going to do about it? price caps??

Nothing should be scary. The FCA can be inconsistent and uphelpful at times. The regulator has always previously positioned itself as not being a price regulator. However, that does appear to be its focus for the year ahead. One area that is will get closer focus (as the FCA have said so) is where all parts of the distribution, platform and investment are under one company. i.e. own branded funds under the same branded/owned platform. That area is too expensive and offers little value (my opinion - the regulator has yet to say what their opinion is. we will find out soon enough).

i thought the FCA might be keen on allowing more "investment guidance", i.e. something that doesn't quite amount to individual investment advice. partly due to the high cost of the latter (or to many people's unwillingness to pay that price). that seems like something positive to HL. they already have their "readymade portfolios" in this area.

That is a bit inconsistent at the moment. On the one hand it says it wants innovation and is supporting robo-advice. But then it says that there can be no shortcuts or diluting of standards and requirements. Robo-advice cannot meet the standards and requirements of full advice. So, there is going to have to be some give and take on this. its early days on this and it will be interesting to see how it develops.

grey_gym_sock

dunstonh wrote: »

A good front end can hide a bad back end or vice versa.

valid point.

LISA is a flawed product. Over complicated, reduced market (due to age). Only allows a small value (so low margin - although when you have a high platform charge like HL, I suppose that isnt an issue) and is at risk of being subject to future mis-sale complaints. Most providers are avoiding for those reasons. When I say flawed, I am not saying that it is not the best option for some people. Just that it wasnt wanted by the industry and wasnt needed.

i do think introducing LISA was pretty daft as a policy decision. it looks a bit like they considered radically altering the model of tax relief for pensions, saw there were problems with and likely opposition to that, and then backed off, but still introduced some of their new ideas as LISAs.

presumably, potential mis-sales is only an issue for advisors, not execution-only providers of LISAs.

i can see the small limits may be an issue for advisors, but for platforms? for investors with more capital, platforms would hope they'd be using both LISA and other wrappers. if you don't offer a LISA at all, all that business may go to your competitors - which sounds good for HL.

also, there is taking the long view. some of these young, not-yet-wealthy people will have more capital to invest later on. it's similar to JISAs, only not quite so far ahead.