AJ Bell: investment platform shakes off fears of bloated cash balances

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About 80 years ago, the writer Fred Schwed rightly questioned why Wall Street’s customers did not appear to have become as wealthy as their yacht-owning bankers. Britain’s regulators are playing catching up, investigating fees and undue costs of investment managers. On Thursday, AJ Bell offered reasons how it differs. Its share price leapt 18 per cent higher.

As an industry disrupter AJ Bell’s success comes down to the low fees it charges for execution-only services. Pre-tax profits of £88mn rose 50 per cent last year. It is the interest rate spread that AJ Bell makes on customers’ cash — rather than fees — which drives its profit growth. Even so, that will catch the eye of regulators concerned with good customer outcomes.

The group revealed details on customer cash balances for the first time. Cash in accounts on its platform for investment advisers is low at just 3.6 per cent of assets. It is higher on its retail platform at 13.3 per cent of assets. Neither figure surprised brokerage analysts. But regulator scrutiny could still force these levels down over time.

AJ Bell does offer its clients better rates on these balances. A partnership with savings marketplace Raisin gives AJ Bell’s customers access to some of the most competitive deposit rates for UK notice and term accounts. AJ Bell also pays between 1.95 per cent and 2.45 per cent on cash balances held in dealing accounts and share ISAs. That exceeds what high street bank Lloyds pays on balances under £4,000.

The threat of AJ Bell losing some of its cash balances was reflected in a share price down about a quarter prior to Thursday. Perhaps for good reason; every 1 percentage point fall in retail platform cash balances erodes earnings by 6 per cent, thinks Andy Lowe at Citi.

This partly explains why AJ Bell shares are historically cheap at 15 times forward earnings, down from 25 times in January. This derating tracks that of those at St James’s Place and Jupiter, both of which had to cut fees this year. AJ Bell did not.

That looks a little harsh. Even with the prospect of lower interest earnings, AJ Bell’s disruptive position and strong growth potential merits a higher rating from the market.