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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 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. “But at the beginning, only a few entrepreneurs really grasped the transformative potential of internet technology.”
Even more important than the technology has been a growing realisation that we will all need to provide for our own retirement, as more companies close defined benefit pension schemes (guaranteed by employers) and move 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.
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 or 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. It 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, 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,” McCombie recalls. “But 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. 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. 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.
A longer version of this article appeared in the spring edition of Baillie Gifford's Trust magazine.
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