Investment platforms face hangover after pandemic party

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LONDON, June 13 (Reuters) – The trillion-dollar retail investment express is running out of steam, dampening the fortunes of British trading venues that have soared during lockdowns following a frenzy of meme stocks.

Many stock pickers are avoiding a turbulent market as the cost of living rises and the economy falters, compressing activity at consumer investment platforms that face falling fees and shrinking margins.

Even the biggest fish, such as FTSE-listed Hargreaves Lansdown (HRGV.L) and AJ Bell (AJBA.L), and those owned or recently acquired by major banks and asset managers, are struggling with flows withering new customers and money.

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Britain’s biggest bank Lloyds (LLOY.L) told Reuters in an interview last month that inflows to its retail investment platforms – which have 19.5 billion pounds ($24.2 billion) of client funds – slowed in the first quarter of 2022 compared to a year earlier, and more clients were selling than buying shares.

The “sugar rush” of social media frenzy that propelled stocks like GameStop last year has dissipated for investment platforms, said Mike Barrett, director of financial services consultancy Lang Cat. .

“Publicly, these companies say they are more comfortable with their customers making sensible transactions rather than tackling meme actions. But unfortunately, this has had a negative impact on their revenue,” a- he added.

The market is more daunting for smaller investment platforms, with around half of them – seven out of 13 reviewed by Reuters – posting losses in their most recently filed annual accounts, according to a review of documents at UK Companies House.

Although the accounting periods varied, the seven loss-making ones included OpenMoney and PensionBee (PBEE.L), which released figures for the year ending December 2021.

OpenMoney chief executive Hayley Millhouse said the company‘s founders were taking a “long-term view to achieve profitability”, in part by diversifying its services.

Romi Savova, CEO of PensionBee, said her product was “exceptionally long-lasting”. She said, however, that startups would likely struggle to raise funds in the current environment, adding that she expected fewer new platforms to launch this year.

Reporting losses is common for fintech start-ups, which typically prioritize early on reaching critical mass over making a profit.

Yet fierce competition and the growing cost-of-living crisis could nonetheless hamper the industry’s growth this year, weeding out weaker players or making them takeover targets, according to many of the 15 platform managers, financial advisors and analysts who spoke to Reuters.

This isn’t just a problem for UK platforms; US pandemic darling Robinhood (HOOD.O) saw a 43% drop in quarterly revenue in April and said it was laying off a tenth of its staff, sending its stock to record highs. Read more

“I can see some of the smaller platforms consolidating or maybe a major player acquiring them,” said Oliwia Berdak, director of financial services research at Forrester. “We’ve had an influx of new investors in the pandemic. The question is, will those people now flee?”

Wall Street giant JPMorgan (JPM.N) bought out loss-making British platform Nutmeg last year, and a crash in tech valuations could make other startup platforms attractive targets, analysts say.

UK bank NatWest (NWG.L) is interested in potential buys in the wealth sector, CEO Alison Rose told a financial conference in Rome last week.

“I think there are opportunities to consider acquisitions in this space if they’re compelling,” she said.

THE TRUE COST DIDN’T DRAIN

It’s a very different scene from 2021, when the number of new clients in the “direct-to-consumer” investing space exploded, with multiple platforms reporting record inflows. The growth was fueled by the social media stock frenzy, which saw an army of small investors pile into shares of GameStop, AMC and other once-old-fashioned companies.

But this year many individual investors, who saw their wealth grow during the historic rally in financial assets at the start of the pandemic, shed losses as stock prices fell amid wartime Europe and inflation. galloping.

Assets held by UK consumer investment platforms fell 2.5% to 906.8 billion pounds ($1.1 trillion) in the first three months of 2022 compared to the end of 2021, according to data from industry tracker Fundscape.

Manuel Pardavila-Gonzalez, managing director of retail investment platforms at Lloyds, told Reuters the cost of living crisis could derail the bank’s £1.7-1.8 billion forecast net inflows of client funds this year, although it does not expect large outflows.

“The true cost of living hasn’t totally sunk into households,” he said.

Lloyds’ rigs attracted £400m in net inflows in the first quarter, down a fifth from £500m a year earlier.

So far this year, the number of new customers has more than halved compared to 2021, Pardavila-Gonzalez said, while the proportion of sales transactions to purchase transactions has also changed, from ‘about 50:50 last year to 55:45 in favor of sales, with more people sitting on silver.

Hargreaves Lansdown and AJ Bell are also feeling the heat.

Customers still added more funds than they withdrew in recent months, the companies said, but new entrants fell sharply on both platforms from a year earlier, down two-thirds and nearly one-third to 42,000 and 36,000 respectively.

The gloom is reflected in their share prices, with Hargreaves Lansdown down 41% and AJ Bell down 27% in 2022, compared to a 4% drop in the FTSE 350 index.

Hargreaves Lansdown said the industry had seen many periods of declining investor confidence and declining flows over the years.

“Resilient providers who focus on supporting their customers fare best,” the company said, adding that it expects the potential size of the UK wealth market to grow from £1.4 trillion in 2021 to £1.8 trillion by 2025.

“RACE TO ZERO ON EXPENSES”

Such resilience can be a harder trick to pull off for many less established players making their way forward.

A review of annual accounts filed with Companies House, a government agency, found that most of the 13 mostly small and medium-sized platforms had reported losses.

However, the annual accounting periods for many of these companies varied, with the end date ranging between December 2020 and December 2021, potentially giving an outdated view of some of the companies’ finances. Indeed, most are private companies which in Britain have up to nine months to publish accounts. Companies that were exempt from filing full accounts because they were too small were excluded from the review.

Freetrade, which saw its pre-tax losses nearly double in the year to September 2021, said it had enough momentum to ride out any downturn. He said the loss reflected the expansion and focus on increasing his customer base during the period, adding that he was moving towards profitability.

Another loss-maker, Moneyfarm, said a recent funding round led by asset manager M&G has bolstered the strength of its business model, which includes offering advice to clients.

“We think there will be some churn within our industry – those who get left behind are likely to be those who … have a minimal relationship with their customers,” CEO Giovanni Dapra said.

Intensified competition over fees charged to customers is also putting pressure on smaller players, experts said, with larger platforms benefiting from an older and less price-sensitive customer base.

“There is a zero race on trading fees,” Berdak said at Forrester. “The margins are very, very thin. So it’s a matter of scale.”

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Reporting by Iain Withers and Carolyn Cohn; Assembly Pravin Char

Our standards: The Thomson Reuters Trust Principles.

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