managing director of hargreaves lansdown believes only three fund supermarkets will exist in three years time
In two years time there will only be three fund supermarkets remaining, according to Peter Hargreaves, managing director of Hargreaves Lansdown. He believes the survivors will be Fidelity, Skandia and his own platform.
While Hargreaves believes the Pru platform may survive, he said Cofunds is groaning under a massive debt and cost burden, particularly for Pep and Isa consolidation. The Hargreaves platform now has £1bn of funds under management, the second largest behind Fidelity. Consolidation and attribution also faces the IFA community, he says.
Hargreaves also criticises the high sales of property funds by advisers and certain riskier structured products.
How bad are the problems facing intermediaries presently and what difficulties are they are facing?
The problems are different from before. When there have been stock market crashes in the past, intermediaries were not as investment orientated. What they were selling after the crash of 1987 was pensions, protection and endowment mortgages.
The only thing that is the same this time around is the selling of endowment mortgages, but this will be for a limited length of time as investors are now more astute and are asking why they should use an endowment to cover a mortgage when endowments are not delivering the goods.
How many healthy firms are there at present?
I really don't know, but I would have thought the firms that are the healthiest are the ones that have a fairly wide brief and can turn their hand to other areas. Several firms have built up massive renewal commission, which is very helpful in this market.
However some of these firms have had two bad Isa years. The market is off 40%, so the renewal is off 40% as well and that goes straight down to the bottom line. If you had £1m a year renewal commission its probably only £600,000 now.
In five years time how many IFA businesses will have gone bust?
I suspect we will see huge amounts of consolidation and an awful lot of ageing advisers will decide enough is enough. I cannot see why an adviser who is possibly 55 or 56 and not too badly off, would want to soldier on if they don't have to.
What about the fund providers?
I really don't know what will happen to the firms that have rushed for growth over the last two years. In general the industry does not have great entry costs but it seems that if you want to acquire lots of intermediaries the entry costs can be quite large. A lot of money is also being thrown at administration systems and administration staff before these people become productive.
Are life companies right to try to buy distribution?
The life industry seems to be putting its hands in its pocket, but I can't see any reason why they are.
You see almost every week that a life company has taken a stake in a distribution company. I still don't really see how they think they will get pay-back on this because if you have a minority stake in a business there is no guarantee you will use that firm for your products.
What are your views of the fund supermarkets at present?
There will only be three maybe four left in two years time: Fidelity, Skandia and ours, and perhaps the Pru.
They were all launched at a time when no one was buying Isas. The Cofunds model is not working. Investors are not consolidating their Peps and Isa because it is costing them money and they will only do it if the industry gets together and says it will transfer stock. But the worst proponents of not transferring stock are the four owners of Cofunds.
How is the Hargreaves Lansdown model working at present?
The reason the Fidelity model will be successful is that they have £15bn of previous Isa and Pep monies that they have put on their platform so they have critical mass. We have £1bn in our platform, which is the second biggest. However we earn more on our supermarket because we earn the renewal whereas Fidelity and Cofunds work for tiny margins.
How well are fund management groups listening to and servicing intermediaries?
I personally believe that if they are going to carry out any marketing or any information it should be done for the general public, not the broker market. It's at times like this when investors need their hands holding and I believe that the investment firms and brokers who do will emerge with huge increases in market share.
Fidelity and New Star are the two groups out there trying to talk to clients and carrying on their marketing to the general public and I think these two are committed to carry on doing so throughout the Isa season. Lots of firms like Artemis and Old Mutual are also trying to get out there.
What will be the big sellers this Isa season?
I think this year's Isa season will be half of last year's and a lot of investors this year will just have a mini-cash Isa. Investors are unlikely to want a tax shelter if there is not going to be any taxable gain.
For the last three years investors have been persuaded to enter the market, first by technology and for the last two years it has been income and corporate bonds, and to be honest they have not done well in either.
Is Hargreaves Lansdown developing from being an adviser into a well-rounded financial provider?
Yes. We believe that most major intermediaries can deliver products to investors. So we can deliver Peps and Isas, we have a nominees service and we have our own Sipp.
We cannot see any need to have an investment or savings plan that is linked to life assurance. We will run regular savings either directly to the investment or directly through a Sipp or an Isa package and if we want life assurance we will bolt it on. We are not believers in packaging life assurance and investment together.
Could you become an intermediary fund supermarket?
No, I don't think so. We think some advisers who are completely fee orientated will charge a fee to put them in our baskets. It is happening already. We would not white label because we would be working for someone else, we think this model always tears companies apart.
What is your view of depolarisation and what will Hargreaves Lansdown do in this environment to survive?
We have never used the word independent in our literature, we believe that because we have a brand, being able to call ourselves independent is not any great advantage or disadvantage to us.
In our execution only business we won't have any problems in not being independent, we will just tie to everyone because we have enough money to do so. Our advice side would have the independent title, but we don't see it as a great problem going forward.
What do you make of Sandler's idea of the generic advice service and would you provide it?
I am afraid Mr Sandler is acting like a boffin. He does not know what an investor looks like or what makes an investor tick.
Half of the excitement of investment, and half the reason why people invest, is taken away with a generic product. These low-cost products are solutions seeking problems.
We already have cast-iron evidence investors won't buy low-cost products. Cat-marked Isas were an unmitigated failure. While people should have something perhaps in a low-cost tracker, it's the thought of Anthony Bolton or Bill Mott managing your money which makes people invest.
You haven't pushed structured products, why?
We have sold them, but we have never sold those on which there is a chance that people's capital might not be delivered back to them.
We have only sold them when there has been a capital guarantee and unfortunately these products are not very sellable. Every month that goes by the five-year products start falling into problems, with many of the three-year products already in difficulties.
What are intermediaries selling too much of at the moment?
Property funds. If you asked the average man in the street what his biggest investment was you would be shocked to hear that it was his property. He already regards the house he lives in as an investment. The next thing you find out is that he has put £100,000 of his free assets into property, so he might have a £350,000 house with a £100,000 mortgage and instead of paying his mortgage off he gears up and puts another £100,000 into property, meaning his investment plan is entirely property. This is no more sensible than putting all your money into a split cap zero.
What do intermediaries sell too little of?
They do tend to take all the clients' money and put it straight into the market. There is a case for feeding the funds in over a period of time rather than put it all in at once. The trouble is, the way brokers are remunerated, it benefits them to putting it all in at once.
The other problem is you do not get any prizes if it proves correct, as clients get very annoyed when the first bit that is put in the market goes up and have to buy it dearer later on.
The one area of the market that needs a lot of cleaning up is corporate bonds. I believe there should be four types of classified corporate bond funds, AAA, investment grade, junk (high yield) and managed. People need to know what they are buying.
There should also be classification by investment style. Some funds are very growth orientated and some are very value orientated and these can provide bigger shocks than market sectors.
What is easier to sell, star culture or fund process, and which one is better?
Process will never expand the market. It is stars and charismatic fund managers who capture the public imagination. Branson managed to sell his tracker fund on his own charisma, if anyone one else had tried to sell it, it would not have sold.
Marketing is going to be essential if the investor is going to be wooed again. They are not going to be wooed on performance statistics.
If you look at the top-selling funds right now they are in general superstar-driven. In almost every single case it is an individual who creates measurable outperformance. Team process is every benchmark driven.
What are the challenges for Hargreaves Lansdown, what changes need to be made? What products areas could you go into?
We want to offer a whole range of investment and financial packages from cradle to grave. It is our savings plans, life assurance, pensions, mortgages, stock brooking, speculative products like CFDs and other stock exchange instruments. We want to offer full wealth management packages and we want people to buy annuities from us when they retire and we hope to expand our dominant position in stakeholders, Isas and Peps.
Going forward we think clients will buy insurance from us and will buy travel, but we are acutely aware that we do not want to expand the brand too much and devalue it.
Qualified as a chartered accountant in 1970 and after a period with KPMG, the international firm of chartered accountants. He had various jobs in industry including Unisys, the computer manufacturer, and Whitbread & Co Limited.
Hargreaves formed Hargreaves Lansdown with Stephen Lansdown in 1981.
The group has grown steadily throughout its 21 years of existence and now employs almost 400 people.
The business incorporates the UK's largest Isa broker, the 10th largest execution only stockbroker and operates a leading fund supermarket.
Paul Bruns and Elaine Parkes
3,000 left to transfer
Record numbers of people aged 90 plus
From 3 to 10 October