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Pension reforms revive profits growth at Hargreaves

Last year’s pension reforms restore profits growth at Hargreaves Lansdown but margins at the funds supermarket remain under pressure.

Pension reforms revive profits growth at Hargreaves

The government’s pension reforms have helped Hargreaves Lansdown (HRGV) buck rocky stock makets and resume profits growth at the country’s biggest investment broker.

Half-year results today showed Hargreaves’ profits before tax rose 6% to £108 million in the six months to 31 December, up from £101.9 million a year ago.

Inflows of new business jumped 23% to £2.3 billion boosted by a 73% leap in self-invested personal pensions (Sipps) following last April’s pension freedom reforms. Overall customer numbers advanced 47,000 to 783,000 and 32 company pension schemes joined its Vantage platform.

The Sipp surge was accompanied by a further fall in Hargreaves' small annuities broking arm, however, where income fell from £1.1 million to £0.8 million as investors ditched annuities and sought out the income 'drawdown' facility on its pension.

Chief executive Ian Gorham said the 'freedom' of not having to buy an annuity at retirement had made pensions more popular.

Since 30 June assets under administration have lifted 7% to a new high of £58.8 billion despite the 3.5% fall in the UK stock market in the second half of 2015.

This is a turnaround from September when the company announced its first fall in annual profits in eight years.

In his results statement Gorham said: ‘Against a backdrop of fluctuating stock markets, Hargreaves Lansdown has continued to be the most popular destination for UK retail investors, with excellent new business for the period. In particular the pension freedoms continue to attract huge interest as we prepare for the important tax year-end period.’

Nevertheless, shares in Hargreaves dropped 4% as the company recorded another drop in profit margins and revealed the costs of its diversification into savings and peer-to-peer lending.

The Bristol-based broker has spent £1.5 million hiring staff for the HL Savings and P2P services it plans to launch in the autumn. This pushed the wages bill 19% higher to £30.3 million, raising operating costs by a similar amount to £50 million.

It is also investing in upgrades for its iPhone and Android apps, which will be unveiled later in the year.

The spike in costs explains why, despite a 10% increase in revenues to £158.8 million, profits were up just 6%.

The other factor is the ongoing erosion of Hargreaves’ previously high profit margins. Revenue margins on funds slipped to 0.45% from 0.47% a year ago and are expected to dip to around 0.42% when commission is fully abolished in April and the company has to rely purely on platform fees paid by investors.

Stock broking margins also fell to 0.27% from 0.31% while margins on cash deposits tumbled to 0.5% from 0.62% although this had been forecast by Hargreaves and is the mid-point in the 0.5-0.6% range it anticipates for this year.

There was good news for shareholders, however, with an interim dividend of 7.8p, up 7% from a year ago.

Elsewhere, Hargreaves’ multi-manager funds - which invest in other funds - attracted a net £369 million, up 35% on the year before. It recently launched the HL Strategic Assets fund and plans to follow this with the new HL High Income fund later in the year.

Last summer's launch of Portfolio+, a ready-made portfolio based on these fund of funds, has attracted £200 million, or 7% of new business, which Gorham said was encouraging as it proved there was a middle band of customers between self-directed DIY investors and those who wanted to pay for fully independent financial advice.

However, Gorham said Hargreaves would not launch a paid-for simplified online advice service based on Portfolio+. The company had asked customers if they would pay between £100 and £400 for so-called 'robo advice' and had received a clear 'no' in response.

'People don't want to pay for advice,' he said, adding that people were unsure of what they were going to get.

This comes amid a big debate in the wealth management sector over whether low-cost online investment management services are the way forward. 'There's no chance that "robo" is going to replace self directed or advised,' Gorham said.

3 comments so far. Why not have your say?

Mike R

Feb 03, 2016 at 17:19

No surprises at open , the city computers again against an overall positive Report turned on the RED. Followed of course by Wall st still worried about too much oil and its effect on Houston.and the US

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Frank Frank

Feb 03, 2016 at 19:40

I am wondering how long HL will be able to defy gravity. The number of fund platforms is getting ever bigger,and its competitors are slowly learning that the customer is not a nuisance, but the one who keeps them alive.

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Peter Young

Feb 04, 2016 at 12:28

I agree with Frank Frank. HL's pricing becomes more and more uncompetitive for investors with portfolios over 40k so they are obviously targetting smaller investors and hoping they won't notice the charges as their investments grow. I moved my ISA away from them to Interactive Investor a couple of years ago.

The website is good but it's largely freely available anyway.

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