Newspaper article The Evening Standard (London, England)

Who Profits? Time for Hargreaves' Loyal Clients to Ask

Newspaper article The Evening Standard (London, England)

Who Profits? Time for Hargreaves' Loyal Clients to Ask

Article excerpt

Byline: Simon English

THIS column is about profit margins. Stay with me. According to the Office for National Statistics, profit margins for non-financial companies are about 12%. In manufacturing, it's 5.5%. So if we buy a sheet of metal for PS100, the metal maker gets PS5.50 profit for his sweat. Fair enough.

At supermarkets, it's lower than that. When Tesco has a good year, which it hasn't for a while, it gets PS4 profit on our PS100 of groceries. Practically a charity. Real-estate firms have a 16% profit margin. Dentists make less than you might think 15%.

The profit margin at financial services company Hargreaves Lansdown (HL) is more than 70%. Its half-year results show it made a profit of PS131 million on revenue of just PS185 million, an astonishing return. In any other industry, this would lead to howls of outrage and calls for competition investigations. For some reason, the City is mum on profits in the wealth management sector. I ask Alan Miller at SCM Private, a campaigner for fund fee transparency, what to make of HL's margins. Wedging his tongue in his cheek, he replies: "It shows that they are incredibly efficient." It does. There is no denying HL is a brilliant business, which has gone from a Bristol bedroom in 1981 to a FTSE 100 giant valued at PS6.5 billion. Founders Peter Hargreaves and Stephen Lansdown major shareholders but no longer involved in the day-to-day have built a company that excels at attracting and keeping investors.

Our chart on the right shows just how loyal HL's customers are the money it receives is awfully sticky. Perhaps that's because customers are impressed by HL's undeniably slick service. Or perhaps they just don't quite get how much they are paying for it.

Let's say the fund you buy from HL makes a return of 4% a year about typical in the long run. You lose nearly 1% of that to the fund manager, and another 0.4% to HL. Then there are trading costs. So you're losing basically half your own profit. This explains why so many customers of the fund management industry in general struggle to tally the story on the news about soaring markets with the pitiful returns on their equity savings.

The big problem with HL (although not for HL) is it charges on a percentage basis rather than flat fees. It's hard to see how this is justified any longer, if ever it was. …

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