“When someone asks me what I am – it does not say chief exec or MD on my passport – it says chartered accountant. You can be an MD or chief exec by spending £100 off the shelf but chartered accountant says something.”
On one level, that would hardly be an unusual remark were it not for the fact that the accountant in question happens to be Peter Hargreaves, chief executive of Hargreaves Lansdown. His company is the most profitable “financial advice” business in the UK, with profits up by 20 per cent to £73m in the year to June 2009, valuing the company at more than £1.3bn at the last count.
By the way, my quotation marks around the words financial advice above are deliberate. For if there is one things that stands out clearly from Hargreaves’ book, In For A Penny, it is that HL is not an IFA firm, certainly not as most of the industry’s practitioners would define the term.
Peter himself describes HL in the book as “a marketing-driven business in an industry that is almost entirely sales-driven”, a distinction that he believes explains why HL has thrived where so many other financial services distributor businesses have failed.
The contrast is slightly false. What Peter and Stephen Lansdown – all too often an unsung hero at HL, albeit not in this book – have built up is a sales-driven business par excellence, with one crucial difference – they have done it better and more aggressively than anyone else.
In For A Penny explains in glorious detail how Hargreaves and Lansdown launched their business in 1981 by taking an idea for a unit trust postal service originally conceived by someone else but doing it much better than had ever been done before.
Every small detail, from the size of the first ad in the Sunday Telegraph, its wording, the funds recommended to punters who wrote in, was carefully worked out, albeit in the context of extremely limited initial resources.
In fact, as Hargreaves points out, they started off by working in the spare bedroom of his house, cutting and pasting their newsletters themselves and then stuffing envelopes in his back garden.
Yet what has always marked out HL from most of its competitors has been its utter commitment and business professionalism. I still remember the “free guides” they used to persuade newspaper personal finance sections to offer their readers. Through those “free guides” came the incremental process of accumulating names and addresses, that famous mailing list which was held in awe by many people in the industry even by the early 1990s.
What is interesting about that early period, apart from the great stories that inevitably flow from any fledgling business start-up, is that while the fundamental idea of a cheap financial product distribution service has not wavered, the specifics of the business model were never set in stone.
For example, while taking 3 per cent from a unit trust sale was not anathema back in 1981, all that changed in the course of the so-called Pep wars in the 1990s, in which Hargreaves Lansdown responded to other industry price-cutters by reducing and then finally doing away with initial commission and, eventually, some of its renewal fees. With hindsight, Peter suggests this was one of the best decisions he was forced to make.
The way they did it is to turn one of the industry’s unack-nowledged secrets – the grotesque amounts of commission paid to those who sell financial products – on its head. It was and remains an incredibly inefficient distribution system.
The reality is that HL could not have succeeded unless it had found a way of unlocking and making use of these vast amounts of money. To gain some understanding of the sums involved, you only have to look at HL’s Vantage platform, which now has £10.7bn of client assets on it. In the last financial year Vantage delivered nearly £85m in revenue.
Yet as Peter casually mentions in his book, Vantage cost £50m to develop, money ultimately generated from the commission paid by the industry to those whose products were initially sold and are now held on the platform.
The difference is that, with most IFAs, that kind of money is inefficiently earned and badly spent, with clients seeing few if any benefits for the vast sums they hand their advisers. HL’s incredibly slick operation is now able to deliver much more for less.
In For A Penny is not a brilliantly written book in the conventional literary sense. It also fails to mention issues such as the firm’s £300,000 FSA fine in 2004 for rule breaches over its risk-rating of split-cap trusts.
But the book is an honest and refreshing read. The personality of its author shines through on every page and there can be few better recommendations than that.
Nic Cicutti can be contacted at firstname.lastname@example.org