Jefferies has updated their coverage of Hargreaves Lansdown in an 11-page note the upshot of which is that the broker has downgraded the investment platform to underperform from its prior rating of hold, and it has cut its price target for the company to 820p versus the current share price of 1044p.
Jefferies points to demographic trends among the Hargreaves Lansdown client base, many of whom it says are children of the 1960s who have been natural clients for the business until now.
But who are now transitioning from being self-determined investors to prospective pensioners in need of advice, and who are likely to leave the (largely) execution-only stock broker in ever greater numbers as result.
Jefferies also suggests that where Hargreaves Lansdown does offer advice it is the “ wrong type of advice “ that is it is a hybrid of Human and Robo advice rather than the full-service advice that those approaching retirement require.
In essence, Jefferies is highlighting what we can think of as generational seasonality within the client base of the firm, and it points to the success that the business is having in attracting a younger clientele.
Welcome as this is, these younger investors are less wealthy than their ageing peers and therefore less profitable to Hargreaves Lansdown as customers.
Jefferies suggests that margins at Hargreaves Lansdown will suffer as result and that they will also come under pressure as the firm invests in new technology and systems.
The bank still predicts operating margins of 50.0% for this year, and 45.0% for next year, though that’s well below Hargreaves Lansdown’s internal targets of 55.0%.
That said both figures are still above the operating margins at their largest rival AJ Bell which has guided investors and analysts to expect a figure of around 33.0%.
Jefferies also believes that new business levels will ultimately slow, and fee margins will continue to be eroded, thanks to the intense competition in the space.
The bank’s analysts also contend that Hargreaves Lansdown’s operational margins won’t be able to compensate for this over time.
Of course, some of these issues are industry-wide and not peculiar to Hargreaves Lansdown.
However, as we have often been at pains to point out there are few winners, if any, in a race to the bottom based on fees.
Hargreaves Lansdown shares have fallen by -0.88% since the note was published.
Tellingly perhaps, AJ Bell shares have fallen by -6.17% over the last two days, which seems to suggest that the market views the potential bad news at Hargreaves Lansdown as being relative, or even as being priced in.
I say that because AJ Bell’s stock has now, fallen by almost -21.0% over the last three months, which brings it in line, with the -22.69% fall that Hargreaves Lansdown shares have suffered over the last quarter.
Hargreaves Lansdown will publish an interim management statement on the 12th of May and full-year results on August 5th.