Stock Picks | Investment Platforms (HL, AJB) - Growth Potential But Can Pricing Hold Up?

14th Jun '23 by P Bryant

5 comments 699 reads

Investment platforms (Hargreaves Lansdown (LON:HL.) and AJ Bell (LON:AJB) seem to have been on my watchlist for ever. But I haven't pulled the trigger on investing in them.

I've been attracted by: good customer retention; the 'natural' growth of AUM/AUA from clients regularly topping up their ISA's, SIPPS's etc, and also the growth from investment returns of clients (although that's volatile); and what should be highly scalable businesses.

But what's put me off is that I've also thought their pricing is likely to come under pressure and that a really good tech disruptor could hurt them - although neither has happened to any great degree (yet?). Also, I've thought valuations have (mostly) been a bit racy, although HL has come off a lot recently - which might make it worth a second look.

Then a really good discussion popped up on my podcasts yesterday from asset manager Ninety One discussing these these companies (and St James's Place (LON:STJ)) and the broader UK investment/savings platforms space. "UK savings platforms: a diamond in the rough" https://ninetyone.com/en/unite... (also on the main podcast platforms). It's not long and definitely worth a listen.

It discusses a few positive growth drivers (demographics, regulation, technology) which I generally agree with but they did a comparison to the US which really caught my attention "Roughly 1 in 5 people have brokerage accounts in the US, which compares to the UK’s 1 in 20." That's making me have another think about the growth potential of these platforms over the longer term (in a good way).

I'm still bothered though by the threat of pricing pressure so I thought I'd throw it open here for comment on what readers and investors in these platforms think about the sustainability of their pricing? I image a lot of Stockopedia readers are clients of these platforms so there should be some good knowledge of this. An additional data point I picked up on the podcast mentioned above ... in the US, Charles Schwab with massive scale, now charges very little in fees and makes most of its money from clients idle cash (net interest income) - although I have not fact-checked that in any detail. So there is the possibility I suppose of very radical pricing changes down the line.

[Roland recently wrote a brief…

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abtan

14th Jun '23

Hi P Bryant

Thanks for the post.

I'm a big fan of the Hargreaves Lansdown (LON:HL.) model but sadly do not hold.

I don't really find them too expensive either. There's a capped fee for holding shares in an ISA - I think £45 per year - and despite the relatively high dealing fees, I'm fortunate that I don't deal very often so this isn't a concern.

Once the current heavy investment is out of the way, I'll be sure to reexamine the business as I think the top line growth prospects remain excellent. The average client age is still relatively young and as long as ISAs still exist AUM should continue to rise each year.

Cheers

turbo

2nd Feb

"AJ Bell (LON:AJB) seem to have been on my watchlist for ever. But I haven't pulled the trigger on investing in them."

AJB chart looking quite bullish at the moment

So I'm pulling the trigger today and securing some.

doug2500

As an investor I just don't know, I think you've highlighted a major unknown. If they survive they're bargains, but if they get undercut and they get left with high overheads.....

As a customer I'm not going anywhere for the sake of saving 20, or £50 a year. But the youngsters might not mind a bit of stock lending, big spreads and whatever else if it's free.

AJ Bell (LON:AJB) trading update for three months ended 31 December 2023:

Platform business

Customer numbers increased by 8,000 to close at 484,000, up 12% in the last year and 2% in the quarter
Total advised customers of 161,000, up 8% in the last year and 1% in the quarter
Total D2C customers of 323,000, up 13% in the last year and 2% in the quarter
Record assets under administration ("AUA") of £76.2 billion, up 15% in the last year and 7% in the quarter
A significant year-on-year increase in gross and net inflows across the platform
Gross inflows in the quarter of £2.7 billion (2023: £1.9 billion)
Net inflows in the quarter of £1.3 billion (2023: £0.8 billion)

A J Bell Investments

Assets under management ("AUM") of £5.2 billion, up 53% in the last year and 11% in the quarter
Net inflows in the quarter of £0.4 billion, in line with the prior year (2023: £0.4 billion)

Link to full announcement issued on 18 Jan 2024

intuitive6191

RE HL and AJ Bell

I would doubt that a new entrant into the market could reach sufficient scale to challenge the market share of these two companies. The long-term market in the UK for investor platforms has all the hallmarks of a market not particularly encouraging for new entrants. In fact, quite the reverse is happening.

Consider over the years how many platforms have either withdrawn from the market or been consolidated

Charles Schwab who you mention, withdrew early. The UK business of TD Waterhouse and some EQI customers have been acquired by Interactive Investor - and I am sure older members of this board will remember the likes of E*TRADE operating in the UK.

Why is this happening?

From a business development perspective, there are relatively few private investors who make their own investment decisions. Some of these investors lose money (heavily) and need constant replacement - it is like filling a bucket with a hole in the bottom and requires significant marketing spend. Those investors who stay the course are probably buy and hold, sticky and not that price sensitive.

The UK might undergo more creative investing and embrace fractional investing etc., but even if this happened, the leading players would still be at the forefront in my view.

Investment platforms (HL, AJB) - growth potential but can pricing hold up?

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P Bryant

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