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This article originally featured in Baillie Gifford’s Spring 2021 issue of Trust magazine.
Back in the days before digital, retail investors tended to buy funds directly from a variety of managers, making it hard to calculate what their total investments were worth. Portfolio changes involved letters, faxes, phone calls and the navigation of complex tax implications. Little wonder most customers just ‘bought and forgot’ or left managing their portfolios to the pinstriped professionals.
Technology transformed everything, enabling the dramatic growth of investment ‘platforms’. These online financial shops allow funds, stocks and other investments to be traded through a single website or app, catering for both do-it-yourself investors and financial advisers. Investors can see all their accounts in one place, monitor and manage holdings, and research new investment ideas.
“People now take for granted this massive improvement in the investor experience,” says McCombie, a champion of the platform companies. “But at the beginning, only a few entrepreneurs really grasped the transformative potential of internet technology. The founders of Hargreaves Lansdown, for example, had the courage to completely reinvent their business to help retail clients.”
Even more important than the technology has been a growing realisation that we will all need to provide for our own retirement, as more and more companies close defined benefit pension schemes (guaranteed by employers), moving to defined contribution schemes (which depend on the performance of investments).
The need for long-term savers to manage their own investments has helped the platform industry to grow by almost 60 per cent between 2016 and 2020, with £550bn now under administration.
This trend has accelerated during the pandemic, partially because DIY investors have more time on their hands. AJ Bell Youinvest, an investment platform, saw its customer numbers skyrocket by 43 per cent over the financial year to 30 September 2020. Hargreaves Lansdown, meanwhile, saw a record 15 per cent uptick in client numbers over the financial year to 30 June 2020.
The momentum of recent years is grist to McCombie’s mill: “Retirement saving will drive growth for many years to come,” he notes.
“Traditionally we accessed this market by buying listed fund management companies, but with platforms we don’t need to make those calls. People hold and manage their savings there, but we don’t have to worry about the skill of the managers in any one company. By and large we’ve sold out of individual investment managers and added to our platform holdings.”
Currently 6 per cent of the UK Growth Fund is invested across listed platforms, including Hargreaves Lansdown and AJ Bell, both of which have a DIY retail customer base. The trust also holds IntegraFin, which runs the Transact platform and serves financial advisers and their clients.
McCombie explains: “We’re looking for companies with strong management teams, and a sense of purpose. The platforms we own are quite different from each other, but they all know what they’re trying to do and they all have a lot of room to grow further.”
These companies may all operate in the personal investment market, but each differentiates itself within its segment. AJ Bell, for example, keeps costs low: “It’s been very successful. It is competing in the same market as Hargreaves Lansdown, which isn’t the cheapest but has tremendous quality of service. Both businesses are adding new customers. This isn’t a zero-sum game.”
Moreover, both are trying not just to increase their own slice but also to expand the whole platform pie. Recent products include Hargreaves’ Active Savings account, giving customers easy access to accounts from a range of banks, and a similar offering from AJ Bell. These initiatives are embryonic, but McCombie sees them helping platforms to reach new audiences – especially young people – and raise brand awareness. “There’s a long game being played there,” he says.
It’s not all been plain sailing. Hargreaves Lansdown found itself in the eye of the storm over Woodford Investment Management’s underperforming flagship fund, for example. But this is where active shareholders such as McCombie come into their own.
The team kept in contact with the Hargreaves Lansdown board when the platform took a pummelling for promoting the Woodford Equity Income Fund right up until its suspension in June 2019.
“We had some frank and challenging conversations with the management and the chairwoman in the aftermath. Reputation and trust are incredibly important for clients and we needed to assess whether they understood the seriousness of the situation and were committed to learning the lessons,” McCombie recalls. “Such conversations are most effective if the detail stays private, but I can say that as long-term shareholders we asked the difficult questions while trying to be constructive and supportive at a time of crisis. I think they understood and appreciated our motives for raising the issues. In turn, we were reassured that the board was listening and was determined to address the matter.”
McCombie notes that the Hargreaves board subsequently took some positive steps, including improving governance of its Wealth 50 best-buy list. “The management team also volunteered to waive their bonuses in 2019 when the situation arose, which showed real leadership,” he adds.
Crucially, Hargreaves continues to attract new clients. “Those challenges haven’t affected its long-term story, and we’re encouraged by that,” he says.
Platforms play an increasingly pivotal role for private investors who are taking up the burden of providing for their own long-term future. The winners will be those focused on customer satisfaction – a recipe for a powerful virtuous circle, as more cash flows into the platforms. “The opportunities are there for them, so long as they don’t screw it up,” McCombie concludes.
Investments with exposure to a single market may increase risk. UK Growth Fund portfolio data to end December 2020.
The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
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Faith Glasgow has been writing about personal finance and investing for almost 30 years and was editor of Money Observer until it was closed last year.
Illustration by darlingforsyth.