At the end of January, one of Europe’s best hopes to succeed as a Robo-Adviser, closed its doors on UK investors, choosing to focus on Germany as its core market.
In a very perceptive article, Malcolm Kerr puts his finger on the problem for Scalable Capital, Nutmeg, Moola and other “Robo-Advisors”. It is confusion not about advice and guidance, but advice and money management. Just what are these “platforms” empowering people to do?
I am sure I’m not alone in getting confused about what the word “platform” means in a financial context, it has been employed so often that it’s an “omni-cliche” for whatever product you are selling as “empowering” your consumer.
The idea behind Robo-Advice is that much of what happens in the advisory and wealth management process, could as easily be done by a robot.
But as Malcolm Kerr points out, this is not what is happening for Robo-Advisers who might reasonably be expecting to be preparing for an IPO, rather than watch Pension Bee steal their thunder.
Nutmeg was founded almost 10 years ago and the last time I looked it had nearly £3bn and 100,000 customers on the platform (note customers, not clients). My recollection from back in the day was that founder and chief executive Nick Hungerford had been clear it could take time to generate profits. But I don’t think he suggested it could take more than twice the time that Amazon took to achieve this goal. So where are we now?
The most recent published results for Nutmeg are for 2019 and show a staggering loss of £21m. As you will know, these losses have widened every year since inception.
Kerr points out that the main disruptors in the market over the past ten years have not been disrupting the consumer’s journey but interfering with the way intermediaries go about their work. Putting aside the joke references to the FCA and FSA, Kerr points to Transact as the only digital disruptor of the wealth management market.
(Transact) disrupted life companies and fund managers — the latter seeing an exponential increase in passive funds given the ability for advisers to take fees from the platform.
Its 2019 operating profit was about £46m and its market cap about £1.5bn. I think that, if we ignore any in-house fund revenues and focus on platform fees, Transact has made more money than all the institutional intermediary platforms put together.
The key for Transact was that they did not go directly to the consumer but made technology available for advisers to share the spoils of wealth management with asset managers. Given that there is only so much that a consumer is going to pay for having money managed and that there is a finite number of clients an adviser can reasonably service, Transact had a pretty powerful proposition for financial advisors who wanted to become wealth managers.
Kerr estimates that £2bn may been spent trying to replicate Transact’s success, with precious little to show to rival shareholders. Disruption is not always replicable and as Ian Taylor showed, much of its success is down to entrepreneurial charisma. Taylor remains a hero to many of his customers , in the mold of John Bogle – founder of Vanguard.
Lessons from “platforms” that work
Many IFAs see themselves as both and argue that each client deserves a bespoke investment strategy that is driven by the close relationship of the adviser with his/her client. I get this model, it works on a financial level but also on an emotional level, personal friendships between clients and advisers are numerous and genuine and most of the time they remain over years. My friend John Mather has clients of 50 years standing.
Advisors are right to point out that these emotional ties of trust don’t work so well with robots and their algorithms. Where the principal point of using a service, is that the service disintermediates the trusted advisor, then the value proposition of the robo-advisor has to show it is both valuable financially and trusted. Algorithms can help in normal times, but they are pretty useless in a crisis. When a global pandemic arrives, the disruptor is disrupted.
But that doesn’t mean that technology has no part to play. Organizations as diverse as Hargreaves Lansdown and Pension Bee have found huge success in meeting customer needs without knowing their customers any more than First Direct of Direct Line know theirs.
If I was a young professional with spare cash from my monthly pay and some bonus or inheritance burning a hole in my bank balance, I might be tempted by a platform that told me it would take away the hurt of knowing my money wasn’t working as hard as I was.
Pension Bee ask the question of their customers – what do you want your money to do? The answer is surprisingly positive, they want their money to grow but not at the expense of the planet. Feeding this back into the loop and Pension Bee get a new “fossil-free” fund out of LGIM and are lining up for an IPO which will reward its founders and early backers handsomely.
And Pension Bee and Hargreaves Lansdown can service at scale because most of their customers know what they’re doing and know that their money is helping them do it. Pension Bee may be the “Hargreaves Lansdown for the under forties” but there is plenty of cross-over between the generations that defies my simple formulation.
Neither financial adviser or wealth manager, these firms enable customers to get on with their lives with the minimum of inconvenience. But their success has been from keeping things simple, both simplify the fund selection process to a point that enables customers to feel in control but not overwhelmed.
The future according to Malcolm Kerr
Malcolm Kerr, like the sadly departed Malcolm Small, sees a burgeoning market for the delivery of robo-advice amongst the digitally savvy oldies of whom he and I are examples.
Perhaps it may be time to transform this experience — especially for later-life clients. Why later life? Because many later-life clients have more time to look, and more risk on the table. And because later life is more complicated. At least, mine is.
When I was working, I had one source of income. My income now includes: state pension, fees for a non-exec role, fees for some consulting, a KPMG defined benefit pension, an EY DB pension, an annuity, royalties from my book — Dirty Money. Terrible People — and Sipp drawdown payments. It would be useful to have all these on my platform. That is just basic.
How about a platform that provides seamless access to other useful information, such as regular household outgoings including insurance policies, utilities, etcetera? And how about the platform messaging clients a month or so before renewal and recommending a replacement or to continue with the incumbent? If savings were on the platform, perhaps it could remind clients that the end of a fixed-term deposit was approaching, providing recommendations regarding a replacement. It could also send information relating to investment markets, tax changes, and so on — all of this branded to the firm.
This idea of an app that is as financially friendly to oldies as Money Saving Expert makes sense. This may be where Pension Bee will go next if Romi & Co want to manage the silver pound. It may be where we take AgeWage.
Robotic delivery is an option for “platforms” operated by people who know about the predicament of growing old with money. I agree with Kerr that many older people are looking to source reliable factual information rather than financial advice and money management. Technology from a trusted third party can become a valuable commodity. Transact, Pension Bee and Hargreaves Lansdown show that. Maybe we have just been putting robots in the wrong jobs.
This is an interesting strategic proposition that deals with a big challenge for automated advice firms. They need to generate a customer base large enough to produce a profit. If the client has a large amount of money to manage, then perhaps they will be looking for a personalised advice service. This suggests that those who are more likely to use the (cheaper) automated services will have smaller pots or flows of money to invest. To make a profit, the automated advice service therefore needs to generate a very large customer base. But the fixed cost of finding and on-boarding people may still make this unprofitable. As a result, it always seems to me that the people who already have a large number of customers, about whom they know quite a lot, are the banks and the insurance companies and that is where automated advice may be a profitable proposition. The banks have customers with deposit accounts that could be invested for a better return. Insurers have maturing policies – and of course pension funds as Malcolm suggests – that would be amenable to an automated advice option.