Is robo advice about to go mainstream?
Having had first-mover advantage in the UK, it appears that robo advice trailblazer Nutmeg may have started to reap the rewards of its endeavours over the past five years; it has more than doubled its number of customers over the past year to 48,700 and has increased its assets under management by 93%, taking its total past £1bn. It is now one of the fastest growing wealth management businesses in the country.
The average size of each account has fallen from £25,000 in 2016 to £20,533 today, which the company says is due to its launch of a Lifetime ISA in April, which has an annual subscription limit of £4,000; however it could equally be a symptom of Nutmeg’s success in achieving one of its stated ambitions of democratising investment by engaging initially less-wealthy millennials.
‘doubled its number of customers over the past year to 48,700 and has increased its assets under management by 93%, taking its total past £1bn’
The challenges faced by Nutmeg and the crop of newbie digital investment managers are well documented; as Muckle reported in October, the company has reported increasing losses for each of the last three years, losing £9.2m in 2016 on sales of £2.56m. More
However, the robo advisor has said that as it scales ‘cost-effectively’ it will move into profitability.
Announcing its figures Nutmeg’s CEO, Martin Stead, said: ‘the way people save, invest and manage their money is changing.
‘When we started Nutmeg, there was no such thing as online wealth management in the UK. Five years on, our model is now becoming a mainstream option for smart investors.
‘We’ve combined our team’s investment expertise with cutting-edge technology and design, to revolutionise the investment industry and bring UK investors a modern, high-quality alternative to the traditional wealth managers and DIY platforms.
‘We are proud of what we have achieved since 2012, but this is just the start and we are gearing up for further rapid growth.
‘Our business is fundamentally about helping people to achieve their big goals in life – such as buying a house, paying for education, saving for a rainy day and preparing for retirement.’
The robo advisors that have launched to date have enjoyed the tail wind of generally rising markets; the acid test of their investment performance will come when things turn turtle as they inevitably will.
Nutmeg says that in the five years since the launch of its fully managed portfolios it has outperformed the average returns delivered by wealth managers for high-net worth clients by between 3.3% and 10.3% net of costs; indeed it is enjoying considerable success in attracting more mature, and more experienced investors.
According to research conducted by consumer financial website Boring Money, it costs robo advisors on average between £200 and £500 to acquire each new customer and its founder Holly Mackay told the FT: ‘low ongoing charges, combined with high upfront acquisition costs, mean that revenues might never cover the costs of acquisition.’
Analysis from IRN Consultants suggested that each new customer signed up is losing the robo advisor an average of £162.50 in the first year and only making £17.50 in subsequent years; a client would therefore have to be retained for the better part of a decade just for the company to break even.
However, Nutmeg’s announcement suggests that the robos may finally be achieving the Holy Grail that the financial services sector has sought for so long by engaging a whole new audience of investors.
That sits very comfortably with Muckle’s founding principle of ‘mony a mickle maks a muckle’; if we believe that financial self-reliance will necessarily replace reliance upon the state it can only be hoped that the robo advisors find a business model that allows them to thrive and reward their shareholders whilst assisting their customers on a journey to financial independence.
‘it can only be hoped that the robo advisors find a business model that allows them to thrive and reward their shareholders whilst assisting their customers on a journey to financial independence’
Mr Stead is bullish, saying: ‘We could turn a profit this year if we wanted to, but we’re choosing not to. We’ve embarked on a very bold mission, which is to empower a generation of investors and for us that means not hundreds of thousands of clients like our competitors, but millions of clients.’
He insisted that Nutmeg is not just the preserve of cash-strapped millennials, saying: ‘the rest of the industry chases after the wealth, but we provide solutions that appeal equally to everyone. Some customers are 18 years old and I get really excited about them because we’re helping them save for their futures and they will be lifetime customers. But the average age of our customer base is 41. We have a 96-year-old customer, and one customer put £3m in without even talking to us the other day. A third of our £1bn assets under management is clients with £100,000 portfolios. So we are appealing to the high net worth as well as the people just starting out.’
Despite Nutmeg’s conspicuous success, Boring Money estimates that robo advisers accounted for less than 1% of the UK’s £192bn non-advised online investment market at the end of the third quarter of 2017.
With £82bn under management, fund supermarket Hargreaves Lansdown is the gorilla in the space with a 43% market share; £54.6bn, (28%) is looked after by the other DIY investing platforms.
Banks account for £26.9bn (14%), asset managers £16.4bn (9%) life companies £10.7bn (6%) with robo advisors weighing in at just £1.7bn.
Topping 1m customers for the first time, Hargreaves Lansdown’s CEO Chris Hill said: ‘Digital and mobile strategies have been key to our success. Nearly 60% of visits to the Hargreaves website are now made via mobile and tablet, compared to less than 20% five years ago. Over the past two years, fund trades made by mobile have almost quadrupled.’
Many of the key robo advisors are now backed by major asset managers; Scalable Capital, with 15,000 customers has £445m in assets under management and is backed by BlackRock (more). Schroders bought a stake in Nutmeg in 2014,n October 2017, Aviva threw its weight behind Wealthify in October 2017 (more) and Moneyfarm has been backed by Allianz since September 2016 (more)
With RBS throwing its hat into the ring with a NatWest branded service, and access to 5m customers, robo advice could be on the cusp of becoming mainstream, and that sits very comfortably with Muckle’s ambition to significantly improve levels of financial literacy and engagement.