13 Jun 2023
Roughly 1 in 5 people have brokerage accounts in the US, which compares to the UK’s 1 in 20. Portfolio managers Ben Needham and Anna Farmbrough explain why they believe the UK’s ratio will move closer to the US over time, presenting significant growth potential for UK savings platforms.
UK equities have not been blessed with a barrage of positive headlines in recent years. A combination of political upheaval, slowing growth and the consistent outperformance of alternative markets such as the US have proven to be difficult headwinds. The UK banking sector epitomises this negativity with a lost decade of total shareholder returns. Yet for all the gloom, we believe there are many reasons to be positive on a specific area of the financial sector, the UK savings market.
The savings market can be broken into three specific areas. First, we have direct-to-consumer businesses and advisory businesses such as Hargreaves Lansdown and St James’s Place. Second, in the middle, we have those who provide platform services for advisors such as Investcentre at AJ Bell, or IntegraFin. Third come the fund managers who build portfolios for retail investors or advisory businesses.
Generally, a key differentiator is a company’s closeness to its end customers, which is where our focus tends to lie. Those that are closest have greater customer loyalty – evidenced by retention ratios – which stand comfortably above 90% for the four companies above. Add to that attractive financial models and a high probability of growth in the years to come due to demographic trends and the need to save, we believe the space should be a cocktail for healthy prospective shareholder returns.
Looking across the Atlantic, there are learnings that we can draw from global peers. Charles Schwab, for instance, has 34 million customers, almost US$8 trillion of assets under management, dwarfing the entire UK market. The company has set a gold standard for customer retention and growth to build a unique competitive advantage. Its vast scale has enabled Schwab to reduce its own expenses ratio, which has enabled it to free up capital to reinvest in its own customer proposition through new products, better services and lower prices, cementing that loyalty. Sharing scale benefits with all stakeholders is an important prerequisite for sustainable growth.
One final learning – looking holistically – is just how well the US savings industry has grown over time in a market that is probably 10-15 years further ahead of the UK in terms of sophistication. Roughly 1 in 5 people have brokerage accounts in the US, which compares to the UK’s 1 in 20. We see three key growth drivers in the latter which underpin our belief that this ratio will move closer to the US over time.
First, demographics. One-third of people born in the UK today will live to 100, which compares to 1 in 10 for those who are 50. People are also working longer, with the shift to defined contribution pension schemes meaning individuals must take more responsibility for their own savings, which will inevitably increase interest in the sector. Importantly, contributions are typically held within a tax wrapper, creating a barrier to withdrawing.
Second, the government is also getting more involved, making pensions more flexible and transferrable, meaning consumers have greater freedom to invest their savings how they want to. Finally, technology has made the platforms very user friendly and – crucially – provides greater access. We have also been encouraged that – despite the worst cost-of-living crisis in many decades – the industry has been relatively robust, with client numbers increasing and retention ratios remaining stable. Once the economic environment improves, flows should accelerate in an industry that is already poised for long-term structural growth.