Neobrokers take aim at Hargreaves Lansdown and AJ Bell

A crop of neobrokers are ramping up their challenges to the industry’s dominant players in a move experts tell Morning Wire could reshape Britain’s retail investment scene.

Revolut announced last week that it had received approval from the Financial Conduct Authority as an investment firm, allowing it to offer UK and EU-listed stocks and exchange-traded funds from next year.

Its entry into an already competitive market underscores how digital challengers see opportunities to attract a younger generation of investors and chip away at the market shares of more established firms like Hargreaves Lansdown, the UK’s biggest retail investment platform.

The 43-year-old broker’s long-standing rivals AJ Bell and Interactive Investor have been joined by fast-growing British upstarts like Freetrade and newcomer Lightyear, which on Monday confirmed it had secured regulatory approval to expand its product range.

The younger firms are attracting serious business. Some 650,000 customers already use Revolut’s existing trading products in the UK, where its banking app services more than 10m customers.

Simon Taylor, head of strategy at fintech Sardine, said Revolut’s “right to win” is its ability to cross-sell new products to its existing customer base. “They don’t need everyone to adopt it to be a major player and for it to make sense for them,” he added.

Meanwhile, a string of international brokers have entered the UK over the last decade to grab a slice of the market. These include Bulgaria-born Trading 212, Israel’s Etoro and US firm Robinhood, the latter having entered the British market earlier this year. Barely 10 years old, Robinhood is now the most popular financial app in America, boasting 24m customers.

Bunq, a Dutch neobank that is the EU’s second largest with more than 14m users, also plans to launch its stock trading feature in the UK should it receive an e-money licence from regulators.

But Britain has proven a tricky market to break into, and some analysts have questioned whether the country is big enough for so many new players.

Robinhood was forced to twice shelve its expansion plans in previous years, and its UK debut in March came shortly after it emerged that domestic rival Public.com would shutter its British operations just eight months after launch, opting to focus on its home market.

“Competition in the trading, rather than investment, space has been growing since the launch of the first ultra-low commission neobrokers in 2017,” said Nick Saunders, the former chief executive of Trading 212 who now leads broker Webull’s UK arm.

“In the past couple of years, a number of international brokers have set up shop in London with varying degrees of success, but home-grown competitors have largely failed to react.”

Battle of the brokers

“One of the biggest drivers of this shift has undoubtedly been the mobile-first approach of the new generation of investment platforms,” said Dan Moczulski, managing director of eToro UK.

As people increasingly use their phones to manage their finances, older investment platforms have struggled to modernise, releasing apps later than neobrokers that were often slower and more complicated.

Competition has centred around international trading products, typically US-listed equities, which incumbent firms either do not offer or charge higher commission to trade than their challengers.

Other market trends, like the rise of cryptocurrency, have also become a key differentiator. Crypto trading is not available on platforms like Hargreaves Lansdown, despite the fact that the sector has brought a wave of new investors to the space.

“Many of these crypto investors will now also be engaging with more traditional asset classes such as stocks, but they won’t necessarily be using long-established platforms – why would they bother when they can invest in stocks through their current provider,” Moczulski said.

Saunders added that incumbent brokers were focused on long-term investments from older clients, rather than recruiting the younger, smaller investors which Revolut or Trading 212 have tempted.

“In the short term, they are catering to different markets. But some incumbent firms have not reacted to the preference of millennial and Gen Z investors to invest internationally and in listed, low cost products – equities and ETFs,” he continued.

“Coupled with that, fintechs are harnessing new technologies to automate both operations and front end services to offer analogous products to traditional products but with significantly reduced costs.”

Consolidation on the cards?

With the market becoming increasingly crowded, firms are under pressure to differentiate themselves.

Saunders expected more “specialisation”, with established brokers doubling down on products like pensions and collective investments and neobrokers offering cheap trading. “But there is a trend, as Revolut shows, towards multi-asset provision,” he added.

Big players could also look to fend off future rivals and absorb their talent by buying start-ups before they reach significant scale.

“Potentially we could see some acquisitions as larger players look to buy expertise and market share in new investors without affecting their existing niche, or larger players leveraging their operations knowledge to enter the B2B space,” Saunders said.

British wealth managers and investment platforms have experienced a wave of consolidation in recent years, including JP Morgan’s swoop for Nutmeg, reportedly worth nearly £700m, in 2021 and Abrdn’s £1.5bn takeover of Interactive Investor in 2022.

This year has seen a slew of deals between start-ups looking to scale up. In October alone, Freetrade agreed to acquire the UK customer base of Australian rival Stake, while Ziglu struck a deal to buy the retail operations of Gibraltar-based rival Damex.