Hargreaves Lansdown (HL) customers stumped up 40% of the record £1.6 billion raised by star fund manager Neil Woodford in June, the investment supermarket has revealed.
In all £680 million poured into the new Woodford Equity Income fund from Hargreaves, with £230 million from new investors attracted by the low annual charge the discount broker secured.
The fund launch coincided with the popular TSB flotation to give the country’s largest execution-only broker an unusually busy end to its financial year after the annual ISA season spike.
The end-of-year surge helped lift annual pre-tax profits by 7% to £209.8 million and enabled the Bristol-based firm to defy expectations in some quarters that it would lose customers after introducing comparatively high new charges in March.
Like other brokers, Hargreaves has been forced to charge customers an annual platform fee to compensate for the abolition of commission rebates from fund managers.
Hargreaves set its platform fee at 0.45% and was immediately undercut by rivals such as Fidelity, Barclays and Charles Stanley. It also misjudged other price rises for investment trusts, probate fees and shareholder voting, which it later withdrew.
Despite the furore these caused, today's results show customer retention only dipped to 93.3% from 94.5% while the number of new customers leaped 43% to 34,200 in its fourth quarter. For the 12 months to the end of June client numbers soared 144,000 to 652,000 with assets under administration advancing 29% to £46.9 billion.
No cash cow
In the City, however, the company’s shares fell 50p, or 4.4%, to £10.89 as investors continued to take profits and expressed concern at Hargreaves’ inability to stem the decline in margins on cash held on its Vantage platform.
Previously, the £4 billion of cash held by Hargreaves' customers has been very profitable for the company. Analysts regard it as an important area as the firm attempts to manage a reduction in its core margin on fund sales, which fell from 0.6% to 0.49% as a result of the new tariffs. Unfortunately, for Hargreaves, the government incentives to boost mortgage lending that have blighted rates for ordinary savers have also slashed the margin on cash from 1.85% to 0.7% since 2013.
The decline in cash margins is the main factor in Hargreaves' profits rising just 7%, compared to 28% profits growth in 2013, despite the impressive customer and asset numbers. The shares have fallen nearly 20% this year after soaring last year.
The company is looking at ways it can improve returns on cash for customers and itself. One option is to see if it can revive the practice of putting Sipp investors’ cash in longer-term deposits, which was banned following the crash of Lehmans bank in 2008.
Chief executive Ian Gorham (pictured) played down speculation that the firm would apply for a banking licence, which would incur more costs and regulatory scrutiny. ‘We’ll only apply to become a bank if we need to, we will investigate other options first and that is what we are currently doing,’ he said.
Also in the pipeline is the launch of a new flexible pension drawdown plan to exploit the ‘pension freedom’ reforms announced by the chancellor in the last Budget. These will make it easier for retirees to manage their own pensions and take effect next April. The changes caused income from annuity sales to slump from £7.7 million to £4.7 million but boosted the sale of drawdown plans by 35% to 17,746.
Danny Cox, head of financial planning, said Hargreaves was also considering offering a discretionary investment management service direct to investors who have tired of picking their own funds and shares. Currently the service is only available to customers of financial advisers and is run by the team behind its £4.6 billion ‘multi-manager’ fund range.