Flat-fee platform Interactive Investor [1] looks set to gobble up rival platform EQi. It’s just the latest in a Hungry Hippos frenzy of deals in the UK.
What should we little guys make of all these clashes of the corporate titans?
This latest Borg-ing [2] is still unconfirmed, but according to Sky News [3]:
II is close to announcing the purchase of EQi, a division of the FTSE-250 support services group Equiniti.
City sources said this weekend that II had agree to pay in the region of £50m for EQi.
Sky News, 17 January 2021
Sky News has a history of on-target business scoops. EQi’s parent Equiniti has now confirmed [4] to the market it’s in talks. The Sky article is written in language that suggests the reporter has been told it’s a done deal.
And the merger makes financial sense to me, too.
Low-fee execution-only online stockbroking is a scale game. The more customers and assets under administration a platform has, the more the costs of its website and trading infrastructure are spread around.
True, extra customers generate extra customer support. So it’s not entirely cost-less to scale.
Hargreaves Lansdown played catch-up for a couple of years to keep its vaunted higher levels of service up to snuff. That showed up in rising expenses in its reporting.
But even service could improve with a larger asset base. It could mean more money to invest in automated solutions, for instance, such as better chatbots.
Higher revenues should also mean more money to fix problems that would have caused the customer issues in the first place.
I’m sure it’s also potentially cheaper to acquire customers via acquisition than by marketing to them. Internet advertising is very crowded.
Against all that, there’s the hassle of integrating a new system – or at the least a new cohort of customers – with the predator’s existing setup.
Makeover, takeover
So much for the broker oligarchs justifying expanding their fiefdoms.
Everyday savers like us might wonder: what’s in it for us?
The loss of EQI would not remove a huge competitive force from the landscape.
The EQi platform was itself born by the takeover of Selftrade a few years ago. It had a rebrand and a website makeover that was a bit marmite-y to users. But it’s hardly shaken up the market.
As for EQi’s fee structure, my co-blogger and platform maven The Accumulator describes it as “absolutely byzantine”.
The Accumulator should know – he’s the man who crunches this stuff for our broker comparison table [5].
In his latest once-over, TA found EQi did have appeal for investors building a portfolio from ETFs who wanted an unrestricted range of options. (Compared to Vanguard, say, which only offers its own funds).
Seems a niche market, though.
Consolations of consolidation
Beyond the specifics of this deal, I can see some advantages for consumers of ever-bigger platforms:
- Cost savings might be passed on to consumers as lower charges
- Potentially more stability and superior customer service
- ‘To big to fail’ platforms should invite greater regulatory scrutiny [6], reducing the risk of systemic failure [7]
- Arguably fewer, larger platforms could be more competitive with each other than with myriad smaller, weaker rivals
On the other hand, there’s reason to fear relentless consolidation.
For a start it’s a hassle. I’ve had trading records vanish following a merger. You might also have to redo elements of identifying yourself [8] to the platform. The acquirers’ anti-money laundering standards may be higher or different.
More importantly for the long-term, there must be a danger that it could reduce competition.
Dealing fees should fall further
Right now the UK investing scene seems fairly competitive – but with definite room for improvement.
In the US trading fees on stocks have pretty much vanished [9] on the major platforms. That shows we’ve still got work to do here.
We do have Freetrade [10] in the UK, and very popular it is, too. But a quick look at our table [5] shows plenty of trading fees being levied by other brokers.
I believe charging dealing fees is no longer sustainable. Any execution-only trade costs basically nothing for a platform to execute these days. With the likes of Freetrade highlighting and exploiting that, rivals look dear. I can only see dealing fees eventually going to zero in the UK.
This suggests we have little to fear from rising prices for share dealing.
As for funds, it’s hard for platforms to hike prices too much with Vanguard [11] now operating in the UK. At least for sensible index investors [12].
Vanguard may not be the cheapest option for all passive investors in all circumstances. But it is close and it acts as a huge gravity well pulling down what other platforms can realistically charge.
Then there are all the fintechs and neobanks pushing towards adding share dealing and other investing services to their offerings.
Again, hard to see the opportunity to hike prices if other firms are making dealing a bolt-on commodity.
Show me the money
Before anyone begins to feel sorry for the plight of platforms, note the big ones make plenty of money.
Hargreaves Lansdown [13] had £104bn in assets under administration as of June 2020. It claims to have just over 41% of the direct-to-consumer platform market, so it’s by far the biggest beast.
On that hefty market share Hargreaves generated £551m in revenues to June 2020. This turned in a pretax profit of £378m, thanks to the chunky margins the platform enjoys.
Its shareholders can decide whether this was good enough to justify Hargreaves Lansdown’s market cap of £7.45bn.
The point is Hargreaves has a lot of profit levers to pull to make money. As well as lots of margin fat to eat into.
It’s a similar story at fellow listed broker AJ Bell [14]. It has £56.5bn of assets under administration, on which it turned a profit of £49m.
Interactive Investor reportedly has £36bn of customer money under its purview to-date. Talk is the company will float some time this year. At that point we would get more insight into its financials.
Meanwhile Freetrade [10] has gathered hundreds of thousands of customers. But when it last raised money it was still not reporting a profit. The start-up has been choosing instead to reinvest any cash generated into the business for growth. It has raised successive rounds of capital to keep the lights on.
The jury is still out on the Freetrade business mode. Clearly it’s a pressure for competitors to reckon with though.
Plenty of platforms in the sea
We’re still far from having to worry about competition being diminished when it comes to investing platforms in Britain.
As our broker comparison table [5] demonstrates, there’s still plenty of options, even after an Interactive Investor [1] / EQi marriage. Our table doesn’t yet include all robo-advisers and the like, either.
Sure, the endless corporate coupling is something to keep an eye on.
But for now I’m content these mergers reflect brokerages fighting to ensure they’ll be left standing among the winners. As opposed to nailing on that we investors will be the losers.
Still, I’m a naughty active investor who is used to paying higher costs than most (sensible) Monevator readers.
I’d be interested in hearing what you guys think in the comments below?
Note: This article contains affiliate links to Interactive Investor [1], Hargreaves Lansdown [13], AJ Bell [14], and Freetrade [10]. If you sign up we might receive a payment from the company, but that doesn’t affect the price you pay. At the time of writing the author is an investor in Hargreaves Lansdown and Freetrade.