Investors are leaving vast amounts of cash on the sidelines in their investment platforms, leaving profit on the table and giving these massive companies free money.
Data from Hargreaves Lansdown’s half-yearly report showed the firm – best known for being used as a way to buy funds and shares – actually made most of its revenue from cash holdings by pocketing nearly half of the interest for itself.
Total revenue of £368.2m was largely down to the interest the firm receives on cash holdings, which accounted for £132.8m of the cashflow. This was more than from the charges levied on fund investors (£120.4m) as well as dealing and ownership costs of shares (£72.4m).
The way it works is Hargreaves – and other platforms – receive an interest rate from a bank on idle cash in customers’ accounts, passing on some, but not all of this to the customer.
In his chief executive statement, CEO Dan Olley said the firm “retained 41% of interest during the period”. This is expected to dip slightly to 36% in the third quarter of the company’s reporting year.
Platforms have been under scrutiny ever since a ‘Dear CEO’ letter from the Financial Conduct Authority was posted at the end of last year. This outlined the City watchdog’s concerns that these companies have been double-dipping (charging customers a fee as well as taking their interest).
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Rising rates mean greater returns on cash. Investment platforms and SIPP operators need now to ensure that how much of the interest they retain and, for those who are double dipping, how much they’re charging customers holding cash, results in fair value.
“If they cannot make that case, they need to make changes. If they don’t, we’ll intervene.”
The shares of many of the UK’s largest platforms tumbled after this statement, with investors fearing changes would be incoming – something which would be detrimental to their revenue, as the stark figures above show.
It should be noted that Hargreaves Lansdown does not charge a fee for holding cash on the platform, and Olley said that keeping money on the sidelines is “an integral part of the way clients use their investment accounts, either holding cash as part of a portfolio or as part of the running of a product, for example, making payments or receiving dividends.”
But investors need to get smarter. I have heard stories of people with tens of thousands of pounds sat on the sidelines due to lethargy. This should not be happening.
If you are someone with a large cash reserve sitting in an investment account, now is the time to do something about it.
This does not mean you have to buy into markets – but it needs to be viewed as a cash-making asset. As at 10 January, Hargreaves said customers with cash on the sidelines in their fund and share account were given a 2.25-2.9% interest rate.
The figure rose to 3-3.7% for stocks and share ISA, junior ISA and lifetime ISA investors, and 3.45-4.2% for SIPP savers. All were well below the 6.25% top easy-access account, which was available on 11 January.
Whether you dive into markets or prefer to remain on the sidelines, there are clearly better options than leaving money in low-yielding accounts via investment platforms.