I don’t want this to sound like sour grapes but it is something that has been playing on my mind for some time. Let me explain…..
We have just started out on a new business venture, we have run portfolios for clients for nearly five years and we are looking at whether we could offer these to other financial planners. There is nothing new in this but the focus for us is on the communication aspect and developing this alongside the financial planner so that it effectively becomes their proposition.
In putting this together I didn’t want to consider the past but I wanted to consider what the future might be and this is important. I am not saying I have a crystal ball but I am trying to understand the challenges people may face.
My feeling from meeting people is this; financial planning in many cases has changed. It is about goals, planning and delivery of goals. Around the edges firms do slightly different things but essentially the offering is similar. So the delivery of service, the clients financial planner and their fees are going to be key going forward and from the people I have met they are already addressing this.
The bit which I think will accelerate this further is the investment proposition – at the moment over 50% of financial planners outsource this, and this will increase. The problem is that the clients can easily see this is not part of the financial planner’s proposition and therefore outsourcing drives down the fees that people can charge so that the client doesn’t suffer double charging. That seems fair in my eyes.
If you flip that round and take control of all aspects of the proposition, then the value of the service is greater and that is what distinguishes one financial planner from another. If financial planners take on the investment side they need to be able to communicate that and be prepared to be open and share their thoughts. My gut feel is that in ten years those who do this will be in a much stronger position than those that don’t.
The problem is we tend to be backward looking rather than forward thinking. Now I could be wrong, I have been in the past and I could be in the future but this is what I think.
Taking this line of thought to the direct market and Hargreaves, I admire Hargreaves and I can see why their shares are so sort after. Any investor will look at various factors when buying shares and one of those is barriers to entry. To be honest for Hargreaves this is something that they have. For anyone to enter this arena it will take them time and money to develop something that even comes close to Hargreaves. If you listen to them now they talk about driving down the costs of funds, taking the proposition abroad, etc etc. They have ambitious plans.
Now this is where my sour grapes come in - possible, but I don’t think so. I have studied their model for some time and there is a flaw (or perhaps more than one flaw). The average client has £40,000 invested and the average fee for these clients that they receive is around £300 to £400 a year. Now the client doesn’t see this and Hargreaves have always marketed their free service. So where do they come in charge wise?
If they charge 0.25% then their fees reduce significantly and this will impact on the share price long term because this is pricing in past profits for future profits. So this is a massive challenge for them.
The second point is that Hargreaves remind me of a company called Skandia (shortly to be Old Mutual), ten years ago you would never have considered that Skandia would be overtaken by other companies but they have been. I suspect that this was because they didn’t look forward, and I think personally Hargreaves is in danger of this.
If we consider my point around financial planners, Hargreaves may have a dig at financial planners but many of the people I have met are already looking at the future and trying to model around that and not consider the past. I suspect Hargreaves know that and that worries them because a new breed of financial planners could be one of the biggest dangers to the Hargreaves model. The other danger is that Skandia for whatever reason didn’t consider anyone could replicate their model, the point was that the successful businesses didn’t replicate their model they produced something that was different and Skandia didn’t change to reflect that. This is the second danger to the Hargreaves model and that is that we and they don’t know what the new breed of direct platforms will look like but they are in danger of being hit by this.
In summary my feeling is this, financial planners are already considering the future and are prepared to adapt to this. This new breed of financial planners could be one of the biggest threats to the Hargreaves model, the second danger is this. Hargreaves and others are considering the past and not the future; they just need to look at Skandia to understand the dangers of this.
Fast forward ten years and look at this blog and see how close I was………