Business

Investment platforms face post-pandemic hangover According to Reuters


© Reuters. FILE PHOTO: City workers cross London Bridge during morning rush hour in London, April 11, 2011. REUTERS / Toby Melville

By Iain Withers and Carolyn Cohn

LONDON (Reuters) – The pace of trillion-dollar retail investment is losing traction, denting the fortunes of British trading platforms that boomed during lockdowns driven by stock meme frenzy.

Many stock pickers are avoiding a tumultuous market as the cost of living rises and the economy slows, choking the business of consumer investment platforms that are facing falling fees and interest rates. shrinking profits.

Even the largest fish, such as the FTSE are listed Hargreaves Lansdown (LON:) and AJ Bell, and those owned or recently acquired by major banks and wealth managers, are struggling with the influx of new customers and money.

Britain’s largest bank Lloyds (LON:) told Reuters in an interview last month that capital was pouring into its retail investment platforms – which boast £19.5 billion (24, $2 billion) client funds – slowed down in the first quarter of 2022 from a year earlier and more customers sold rather than bought shares.

Mike Barrett, director of financial services consulting firm Lang Cat, said the “sugar rush” of social media that boosted stocks like GameStop (NYSE:) last year has worn down investment platforms. private.

“Publicly, these businesses say they’re more comfortable with their customers making sensible deals than running after some stock meme. But unfortunately that’s had an impact. negatively on their revenue,” he added.

The market is making it harder for smaller investment platforms, with about half of them – seven out of 13 assessed by Reuters – posting losses in their most recently filed annual accounts, according to a literature review at the UK Company Institute.

Despite different accounting periods, the seven loss-making companies included OpenMoney and PensionBee, who released figures for the year ended December 2021.

OpenMoney CEO Hayley Millhouse said the company’s founders are taking a “long-term view to achieving profitability”, in part by diversifying the company’s offerings.

Romi Savova, CEO of PensionBee, says their product is “exceptionally long-lasting”. However, she said that startups will likely find it difficult to raise financing in the current environment, adding that she expects few new platforms to launch during the year. now.

It is common for fintech startups to report losses, which often prioritize gaining volume over turning profits.

However, fierce competition and a growing cost-of-living crisis could hamper the industry’s growth this year, knocking out weaker players or making them a target for takeovers, Many of the 15 platform managers, financial advisors and analysts told Reuters.

It’s not just an issue for British platforms; Pandemic darling Robinhood (NASDAQ:) posted a 43% drop in quarterly revenue in April and said it was laying off 1 in 10 employees, sending the company’s stock to a record low. .

“I could see some smaller platforms coming together or maybe a big company acquiring them,” said Oliwia Berdak, director of financial services research at Forrester. “We’ve had a huge influx of new investors during the pandemic. The question is, are those people running away now?”

Wall Street giant JPMorgan (NYSE:) started losing money on UK platform Nutmeg last year, and a collapse in tech valuations could make other start-up platforms fall, analysts say attractive target, analysts say.

Chief executive Alison Rose told a financial conference in Rome last week British bank NatWest was interested in potential purchases in the property sector.

“I think there’s a lot of opportunity to look at acquisitions in that space if they’re attractive,” she said.

COSTS RIGHT NOT CHEAP

It’s a very different scene from 2021, when the number of new clients in the “direct-to-consumer” investment sector skyrocketed, with several platforms reporting record entrants. Growth was fueled by the social media-fueled meme stock craze, which saw an army of small investors flock to the stock of GameStop, AMC, and other out-of-date companies.

But this year, many individual investors, who saw their wealth grow during a historic rally in financial assets earlier in the pandemic, have suffered losses due to the slide in stock prices. steeply in times of war in Europe and rampant inflation.

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

Manuel Pardavila-Gonzalez, managing director of Lloyds retail investment platform, told Reuters the cost of living crisis could skew the bank’s forecast for net customer inflows 1.7-1, £8 billion this year, although it’s not expected to be significant. output streams.

“The cost of living really hasn’t completely impacted households yet,” he said.

Lloyds platforms brought in £400m of net inflows in the first quarter, down a fifth from 500m the year before.

So far, the number of new customers has more than halved compared to a bumper 2021, Pardavila-Gonzalez said, while the ratio of sales to purchases has also changed, from around 50:50 last year. down to 55:45 in favor of sales, with more people using cash.

Hargreaves Lansdown and AJ Bell are also feeling the heat.

The companies say customers are still depositing more funds than they withdraw over the past few months, but new entrants have plummeted in both platforms year-over-year, down two-thirds and almost one-third down to 42,000 and 36,000, respectively.

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

Hargreaves Lansdown said the industry has seen many periods of falling investor confidence and lower flows over the years.

“It is the flexibility providers that will focus on helping their customers to be the ones with the best prices,” the company said, adding that the potential size of the UK wealth market will increase from £1.4 trillion in 2021 to 1.8 trillion in 2025.

‘CHANGE WITH NO FEES’

Such resilience could be a trickier trick to pull off for many lesser-known players struggling to move forward.

A review of the annual accounts filed with the Company, a government agency, showed that most of the 13 mostly small and medium sized platforms reported losses.

However, the annual accounting periods for many of these companies vary widely, with ending dates ranging from December 2020 to December 2021, thus potentially giving an outdated overview. financial position of some companies. This is because most are private companies, in the UK there is up to nine months to post an account. Companies that were exempt from filing full accounts because they were too small were excluded from the review.

Freetrade, which saw pre-tax losses nearly double in the year to September 2021, says it has enough momentum to weather any downturn. It said the loss reflected its expansion and focus on growing its customer base during the period, adding it was increasingly turning a profit.

Another loss-making firm, Moneyfarm, said a recent funding round led by an M&G asset manager has bolstered the strength of its business model, including offering clients some advice.

CEO Giovanni Dapra said: “We think there’s going to be a degree of disturbance in our industry – the losers are likely to be the people who … have minimal relationships with their customers. .

Increasing competition on customer fees is also putting pressure on smaller players, experts say, with larger platforms benefiting from an older, less sensitive customer base price.

“There is a race to zero in terms of transaction fees,” said Berdak at Forrester. “The margins are very, very thin. So it’s about scale.”

(1 dollar = 0.8049 pounds)

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