UPDATE 2-Fee changes cloud Hargreaves Lansdown profit outlook

Wed Sep 3, 2014 6:03am EDT

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By Simon Jessop and Nishant Kumar

LONDON, Sept 3 (Reuters) - UK financial advisor Hargreaves Lansdown's full-year profit growth fell slightly short of expectations and it failed to reassure investors about the impact of new rules on fees, sending its shares down 3 percent on Wednesday.

Hargreaves Lansdown made the most of a buoyant equity market by attracting plenty of new business, helping justify analyst "buy" ratings and a relatively high stock valuation.

But investors are concerned that the UK's Retail Distribution Review (RDR) aimed at making fees more transparent could cut its profit margins.

Hargreaves Lansdown has spent 18 months implementing the changes and said it would now focus on expanding its business. It said other changes to pensions and savings rules were likely to support revenues.

Describing the results as a "small miss", Jamie Constable, a partner, equity sales at N+1 Singer, said the share reaction was a combination of a "punchy" valuation and some near-term uncertainty about margin pressure as a result of RDR.

The strong equity market activity, particularly the listing of Royal Mail and the launch of a new fund by 'star' fund manager Neil Woodford, helped net new business surge 25 percent to 6.4 billion pounds ($10.54 billion).

A total of 144,000 new clients were added in the year to the end of June, boosting assets under administration by 29 percent to 46.9 billion.

While revenues rose 8 percent to 291.9 million pounds, they lagged the 342 million pounds expected by the market, Thomson Reuters data showed. Pretax profit, up 7 percent at 195.2 million pounds, lagged forecasts by around 15 million pounds.

The rise in new business and pretax profit underpinned an 8 percent increase in the total dividend to 32 pence a share, made up of a second interim ordinary dividend of 15.39 pence and an increased special dividend of 9.61 pence a share.

More than half of analysts had a "buy" or "strong buy" recommendation on the stock heading into the numbers, Thomson Reuters data showed.

Hargreaves stock trades at nearly 30 times its expected forward 12-months earnings, about 25 percent above its five-year median figure and against 13.6 times average for its peer group.

"JURY OUT" ON PROFIT MARGINS

The operating profit margin on net revenue was down slightly over the year, the company said, at 71.3 percent against 71.5 percent in the previous year.

"The jury's out a bit on the margins at the moment. Are they going to see margin pressure, are they going to have to invest in margin as a result of the changes we've seen in RDR," Constable said, citing competition from rival platforms such as that of Fidelity.

That aside, he said changes to the pensions and savings industry announced in the budget should support the company by making assets under administration "more sticky".

The removal of an obligation to buy an annuity, or income for life, at retirement had seen the company's annuity business drop 50 percent. But business in the more flexible and more profitable income drawdown business rose 35 percent.

"From our perspective, the opportunity to help clients make the most of their money for longer is beneficial both for investors and for company revenue, as our relationship with the client continues for longer under drawdown than an annuity purchase," the company said.

It said it could also benefit from potential changes to the way advice and information are given to investors, currently being consulted upon by the UK regulator, which could focus on delivery online and by telephone. ($1 = 0.6074 British Pounds) (Reporting by Simon Jessop; editing by Pamela Barbaglia and Tom Pfeiffer)

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