Morgan Stanley has upped its price target on Hargreaves Lansdown by 50% just 24 hours before the platform reveals its new fee structure, after the bank's analysis suggested consumers are prepared to pay more for advice and platforms than previously anticipated.
Analysts at the bank have raised Hargreaves from neutral to overweight and upped their price target from £11.13 to £16.70, having carried out proprietary research, competitor analysis and meetings with the Financial Conduct Authority (FCA).
They suggest Hargreaves' pricing announcement, due out tomorrow, will be revenue-neutral for the business, with a structure close to the current net 63bps charged for funds.
The firm's AlphaWise study, surveying over 1,000 retail investors with average investments of £51,000 each, pointed to both a stickiness of assets post-Retail Distribution Review (RDR) and a willingness to pay for advice.
"Our survey suggested consumers would be willing to pay between 50-100bps for investment recommendations on £10,000 of assets. This is higher than anticipated and well within the current charging structure of HL," the analysts said.
The study found 24% of respondents were prepared to pay a 0.5% charge on an investment amount of £10,000, with 38% prepared to pay 1%.
Morgan Stanley acknowledged Hargreaves appears to be the most expensive D2C provider on a surface level, but said accurate comparisons of all costs would prove "almost impossible", and argued consumers "are unlikely to switch providers for 10bps on £40k, ie £40."
That analysis has prompted the analysts to rethink their assumptions about the kind of prices Hargreaves can sustain over the medium-term.
"In all, this leads us to revise our pricing expectations. Our new platform fees begin in around Q4 2014 at 60bps (vs. 57bps previously) falling to 56bps by around FY 2016 (49bps previously)," the analysts added.
Morgan Stanley added its conversations with the FCA regarding the ongoing thematic review of the execution-only space suggest the regulator is unlikely to crack down hard on D2C providers, or Hargreaves in particular.
"We do not believe providers employing focus lists e.g. HL with its Wealth 150 funds, will be deemed as giving restricted advice," the analysts said.
The investment bank had previously identified a £130bn opportunity post-RDR as banks exit the market and an advice gap emerges; it now sees HL as standing to capture some 10% of this figure in the coming years.
These factors mean Morgan Stanley predicts Hargreaves' share of the UK retail fund market will double over the next few years, from 2.5% to 5%.
As a result they see further upside for the share price, despite the stock having risen 110% over the past year and some 50% over the last three months alone.
Their upgrade boosted the platform's share price a further 2.5% this morning, pushing the price above £15 for the first time. Shares were trading at £15.18 by mid-afternoon.
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