AJ Bell founder warns unprofitable investing platforms face trouble

“It’s honestly pretty frightening how many players are on the direct-to-consumer side right now,” says AJ Bell founder Andy Bell of the proliferation of new investment platforms in recent years.

Investment platforms, which allow users to invest in stocks, as well as sometimes trade currencies, cryptocurrencies and complex financial instruments, have mushroomed in DIY trading in the wake of the Covid-19 lockdowns.

Major city commuters will be familiar with the magnitude of public transportation advertising these companies have done, particularly those offering exposure to cryptocurrency, while online promotion is also common.

But Bell, a longtime DIY investor, says retail investors need to look beyond flashy ads when deciding where to put their money

Bell, who moved into a consulting role at AJ Bell last year, told This is Money that unprofitable platforms could “go off the cliff in the not-too-distant future,” increasing the potential for clients to lose.

The former CEO of AJ Bell says, “Some of these start-ups are already running out of runways.

“AJ Bell made a profit in the first month and has made a profit every month in its existence — I think that’s old-fashioned these days.

“At the end of the day, companies need to make money and there are some business models that I look at that I think are just unthinkable that they could ever make money now.”

While platforms are authorized and regulated by the Financial Conduct Authority, the regulator and some politicians have raised concerns about the massive increase in DIY trading and the potential risk to investors.

But Bell suggests investors are also at risk from an uncertain future for the platforms themselves, especially as trading activity slows and rising interest rates make fundraising more difficult.

He says, “There are companies that, without another fundraiser, will go off the brink in the not-too-distant future.

‘You can expect a company to still exist in 12 to 24 months and beyond. I think the regulator has a responsibility.

“Over the next two years, as private equity capital dries up for these guys and they’re still on cashburn, I’m not sure what’s going to happen at the end of the runway.

“We don’t want a situation where there are bad outcomes for clients and that’s one thing I’m not sure how good the regulator is at the moment.”

Bell moved into his advisory role at the longstanding platform that bears his name after a bid to join AJ Bell’s board was rejected by the FCA on board grounds last year.

Bell, 57, founded AJ Bell in 1995 with colleague Nicholas Littlefair after returning from a three-year stint in the US coaching tennis and soccer.

Before that, he worked as a junior actuary at a large insurance company.

He says: ‘I didn’t really like being an actuary in training, I ended up in the world of big business and ivory towers and that didn’t really suit me.

‘[When I came back from the US] I finished my exams, joined a small actuary consulting firm, which then sold to an investment bank – saw it written on the wall where I would go back to big business politics. So that was really the trigger for me to start AJ Bell.”

Investment: Andy Bell (left) with Transform Hub founder James Calderbank, co-founder Wendy Barker, and former AJ Bell executive Fergus Lyons

AJ Bell started life with £10,000 in personal loans as a petty actuary and is now a FTSE 250 firm providing investment platforms and brokerage services with both an advised and a direct-to-consumer offering.

It employs around 13,000 people and has approximately £75 billion in assets under management.

Bell says, “I’ve always told people in the company to think like a small company. If we start thinking like a big company, we’ll end up operating like a big company and risk becoming one of those old financial services companies that I wouldn’t like AJ Bell to become.

“They’re killing themselves with corporate governance and losing any entrepreneurial spirit they’ve ever had.

‘They all have a lot of customers, but they don’t really do anything about innovation or growth, those are the two things that really always get me out of bed in the morning. It’s about knowing that we’re growing the business in a profitable way.”

Bell was replaced last year by Michael Summersgill ahead of the FCA’s decision to deny Bell a board position on the grounds of governance risks, forcing him to take on an advisory role. The decision eventually led to the resignation of chairman Helena Morrissey.

Details were scant about the nature of Bell’s role at the time, but reports suggest AJ Bell pays a company ‘associated with Andy’ called Blythe Business Services a total of £150,000 for 48 days of his services a year.

“I decided that I would continue to support the company in whatever way I could, which ultimately turned out to be doing what I did best in the business,” says Bell.

“I help with the marketing side, the technical side, and some of the lobbying that we do, which is an active part of the business.”

We only need one type of Jes

Much of the lobbying focus is on AJ Bell’s bread and butter, Isas, in the belief that UK personal investment tax papers urgently need to be rationalised.

“There are too many Isas and people get confused,” says Bell, referring to the five types of Isas offered in the UK: cash Isas, stock and equity Isas, innovative financial Isas, junior Isas and lifetime Isas.

‘In Sweden they have something they call an ISK and that’s their equivalent. It is very different in structure, but very simple to understand and very popular.

‘We have to get to the point where there is only one Isa left on offer. All those different variations only confuse people.’

Bell has also been active apart from the company he founded 28 years ago, using his personal wealth to invest in early-stage UK companies.

In January, Bell invested £1 million in fitness franchise Transform Hub, along with former AJ Bell chief executive Fergus Lyons, as part of its strategy to bet on companies focused on wellbeing and health.

Launched in 2018 by personal trainer James Calderbank, Transform Hub has 20 boutique group training studios across England and moved in 2020 to accelerate growth through a franchise model.

The £1 million investment will be spent on acquiring new franchise locations, with the team aiming to employ 300 people across 100 locations by 2025.

But how does Bell’s own experience of starting and growing a business affect his approach to this type of investment?

He says: ‘It starts with the people in the first place. You have to look at the people and believe that they believe in the concept – it’s not always about having a brand new idea that has never been done by anyone before.

“Sometimes it’s about doing something other people have done before, but just doing it a lot better. I would probably do what we did with AJ Bell.

“He had one or two firsts during the time I ran the company, but really a lot of it was just trying to do things better and with more value.”