In a research note published on Wednesday (7 November), the Swiss bank's equity research division said both firms are set to face revenue growth headwinds from cyclical challenges to net new business and market returns.
However, analysts argued that the biggest risk is to interest earned on client cash. UBS has estimated that interest earned on client cash makes up more than 80% of AJ Bell's pre-tax profit for this year, and 55% for Hargreaves Lansdown.
The firm said that regulatory risk to revenue was high for both providers in light of the Financial Conduct Authority's Consumer Duty obligations. Given this, UBS forecasts both firm's retained interest spread on client cash to fall to 150bps in 2025.
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"This follows the latest 'Dear CEO' letter from the FCA to platforms on 28 September, which highlights interest on client cash as an emerging risk of harm," it said.
UBS said it expects a more positive macroeconomic environment to support stronger fund flows and market returns for all investment platforms.
However, it noted that HL's premium pricing looks "increasingly unjustified" when compared to similar product ranges, quality and customer service at lower cost competitors.
"We see this keeping HL's net flows at lower levels than history - with further deterioration in its market share. For example, new competitor Vanguard has grown since launch in May 2017 to more than £16bn AUA in April 2023," UBS said.
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For AJ Bell, UBS said it is "well positioned" to grow its market share, thanks to a "competitive" pricing and service offering, noting that the provider has consistently gathered more direct-to-consumer net new business per customer than larger competitor HL.
In the last quarter, the bank said AJ Bell gathered more absolute D2C flow than HL, which has six times its assets under administration, and that in the adviser business, the firm is a top five UK platform by net flow, despite its small scale.
However, the bank said it sees near-term earnings risk from cyclical AUA headwinds and lower interest retention on client cash far outweighing the potential longer-term benefits of this strong competitive positioning.