AJ Bell PLC (LSE:AJB, Financial) debuted on the London Stock Exchange in 2018, so it has only a relatively brief presence in the stock market annals. As is the case for many initial public offering stocks, its first few years were difficult and the stock has seen a 20% decline year to date and a nearly 35% slump over the past three years. The company is a member of the UK’s FTSE 250 index and operates in the investment services sector.
The company exhibits traits emblematic of a prosperous online platform enterprise in terms of profitability. While its profit margins and return on capital employed lag behind those of its competitor, the much larger and FTSE 100 member Hargreaves Lansdown PLC (LSE:HL., Financial), they remain impressive nonetheless.
Comparing AJ Bell and Hargreaves Lansdown
AJ Bell and Hargreaves Lansdown, though comparable, diverge in their business models. Hargreaves Lansdown primarily operates as a direct-to-consumer investment platform, offering individual savings accounts, pension plans, investment accounts and retail stock broking. In contrast, AJ Bell manages a sizable advisor business alongside its direct-to-consumer platform.
Notably, 70% of AJ Bell's assets under administration reside within its advisor platform. I attended an AJ Bell presentation for advisors not that long ago and I was very impressed with the event.
Revenue margins and business models
However, the advisor business entails lower revenue margins compared to the direct-to-consumer segment (0.22% in first-half 2023 versus closer to 0.5% for direct-to-consumer). This discrepancy, combined with AJ Bell's more competitive fees in advisory, elucidates the disparity in revenue margins between AJ Bell and Hargreaves Lansdown.
In terms of direct-to-consumer revenue margins, AJ Bell approaches Hargreaves Lansdown's levels. Both entities have witnessed enhanced revenue margins in 2023 due to elevated interest rates on customer cash balances. I would anticipate this trend will wane if interest rates decline, which they may in 2024 or 2025.
Growth prospects
Steady headway in expanding assets under administration characterizes AJ Bell's trajectory. Aligning with much of the asset management domain, the company employs a pricing structure wherein customers pay a percentage of their invested funds. Thus, AUA growth fundamentally drives revenue expansion.
Though overshadowed by Hargreaves Lansdwon, AJ Bell has demonstrated consistent advancement in customer base enlargement and AUA expansion. Anecdotally, I have noticed a lot of AJ Bell advertising in the last two or three years. Much of the customer base growth has been in attracting new investors who were tired of zero interest rates in their bank accounts. At some point, the company will have to try to win market share from direct competitors.
For now, though, opportunities for substantial growth in the U.K. market persist. AJ Bell posits a 3 trillion pounds ($3.9 trillion) potential within the investment platform sector, with 2 trillion pounds currently untapped, residing outside established systems. This reservoir encompasses personal pension plans and induvial savings accounts held outside of investment platforms. Encouragingly, this capital pool requires no fresh infusion; it is already there.
Risks and opportunities
In the near term, prevailing economic constraints – including surging mortgage costs and general inflation – constrict disposable income, particularly among the younger demographic. This dampens contributions to individual savings accounts and self-invested pension plans, further exacerbated by the U.K. stock market's downturn, which curtails share trading activity.
Conversely, the long-term necessity for tax-free personal savings plans to ensure retirement provisions is poised to burgeon. The present government's policy adjustments, elevating the annual contribution cap to £60,000 and eliminating the lifetime allowance for pensions, bolster this outlook. The enduring 20,000-pound ($26,000) tax-free annual individual savings account contribution allowance amplifies this positive context.
Operational capabilities and marketing efforts
For AJ Bell to harness these potential growth factors and seize a larger stake in the platform domain, it will need to improve further its already quite good operational capabilities. Hargreaves Lansdown’s ascendancy can be attributed in large part to its adept marketing and customer service investments over the past 25 years.
Recognizing its own marketing lag, AJ Bell has streamlined its operations under the AJ Bell brand (previously it had several different brands, which made them all seem like smaller less known quantities), and this is being augmented by expenditure on TV, radio advertising, and event sponsorship, which as I said, I have been noticing. At the same time, technology and employee investments are ongoing.
Employee investments and customer retention
Notably, wages have recently surged by a double-digit margin, accompanied by the allotment of 2,000 pounds in AJ Bell shares to employees, giving them skin in the game. This concerted investment is reflected in the company's commendable customer retention rates surpassing Hargreaves Lansdown, who lost plenty of customers following star fund manager Neil Woodford’s investment trust blow up several years ago, which Hargreaves had heavily recommended.
Moreover, AJ Bell recognizes that the pursuit of growth necessitates outreach to a younger clientele. To this end, the introduction of the Dodl mobile app aims to simplify investing for gen Z. The platform offers diverse accounts encompassing individual savings accounts, pensions and stock broking, presenting users with an accessible array of funds and shares for investment.
AJ Bell has also expanded its in-house portfolio of branded investment funds. These cost-effective, pre-structured funds with multi-asset portfolios cater to investors who prefer not to handpick their investments.
Regulatory developments and pricing strategy
The recent enactment of the Consumer Duty regulations by the U.K.’s Financial Conduct Authority bodes well for AJ Bell's customer acquisition efforts. Notably, this initiative mandates transparent pricing and value disclosure to customers. In a landscape where extant pension schemes bear substantial charges, AJ Bell's capacity to showcase more favorable terms may help win market share. Technological advancements have further facilitated the seamless consolidation of pension plans onto its platform.
Additionally, it is commendable that AJ Bell pledges to pass on the benefits of scale expansion to customers in the form of lower prices. Unlike historical trends of profit margin growth derived from price hikes, the company anticipates sustained profitability through increased scale and optimized utilization of fixed costs.
Stock performance and financial position
The recent stock price performance might, therefore, be an interesting buying opportunity. Higher interest rates have caused a substantial decline the stock’s price-earnings ratio. This multiple compression has reduced the stock price even as earnings per share is seen as growing. But the company's financial position is robust with an extremely strong Altman Z-score of over 20.
Conclusion
I have compared AJ Bell’s investment platform with multiple competitors and found it to provide a very competitive offering, both in terms of cost and range of services. The over a decade of zero interest rates has caused a greater percentage of the population to become investors, and they have learned that diversified fund investments offer higher returns than bank savings. AJ Bell has capitalized on that trend and has built up a strong brand.
For investors who are interested in mid-cap financial services stock, AJ Bell is worth putting on your watchlist.
