Hargreaves Lansdown reported declining margins on its Vantage platform last week, but can it really tackle the bigger issue of plummeting returns on client cash? Dan Jones looks at the conundrum facing the platform.
The UK's largest D2C platform did not move to an unbundled pricing model until Q4 of its financial year, but last week's full-year results gave an early indication of the margin pressures it is facing.
With all the talk of clean pricing, preferential share classes, and negotiations with fund groups last year, investors – and the fund industry itself – are watching closely to see if falling margins will erode the group's competitive advantage.
Last week, as expected, Hargreaves reported margins on its Vantage platform fell, and warned they will fall further still (from 60bps pre-RDR, to 49bps post-clean pricing, and an estimated 44bps post-2016 legacy commission ban).
But the company seems comfortable with the changes at this stage, pointing to client and asset retention levels that remain elevated.
Hargreaves CEO Ian Gorham (pictured) went so far as to tell analysts RDR "has not had much of an impact on our business".
However, the focus on margins here may just be obscuring a much bigger issue for the group: plummeting returns on client cash.
The platform's Vantage customers currently hold some £4bn (of a total of £44bn in AUA) in cash. The interest revenue margin Hargreaves earns on this amount has fallen from 185bps in financial year 2013 to 70bps at the start of its 2015 financial year, as a result of schemes like Funding for Lending pushing down LIBOR rates.
Headlines about HL applying for a banking licence in order to boost returns on this money underline just how big an issue this is becoming for the platform.
Having negotiated aggressively on fund pricing, and set its platform price towards the upper end of the mass market, there is hardly any scope for a positive surprise on Vantage margins. It is not surprising, then, that Hargreaves sees the client cash problem as the one it has the best chance of reversing.
That is easier said than done. According to Numis, the broker, the discrepancy between Hargreaves' full-year asset growth (29%) and profit growth (7%) is down in a very large part to compressed revenues on cash.
Gorham said last week a banking licence would be a last resort for the group: Hargreaves is concerned the upheaval this would involve, in structural and regulatory terms, could distract it from its core business.
The need to find a way to boost returns here remains paramount. A rate rise would provide some help. In the meantime, other options the group is understood to be looking at include a P2P lending service, though it has played down suggestions it may invest cash in sovereign debt.
Hargreaves' share price dropped almost 5% on the day of its results, and this seems as much in keeping with recent sentiment on the stock as it is a reaction to any news contained in those figures.
The margin pressure story, then, is a familiar one to analysts and investors alike. But, given the stock's run over the past decade, and the fact it still trades on 32 times calendar year 2014 earnings, mitigating the decline on cash rates looks essential if Hargreaves is to reverse the profit-taking trend.
