(image: istock)

    Selling robo-advice just got even tougher

    27 May 2017

    The boss of London’s largest UK ‘robo-advisor’ promised it was going to ‘redefine the UK investment industry’. Now five years on from launch, ex-stockbroker Nick Hungerford no longer runs Nutmeg, the firm he founded, though he still has a stake in it. He was replaced as chief executive by Martin Stead, an ex-Proctor & Gamble marketing man who once ran campaigns for Ariel detergent.

    Hungerford’s was not the only departure from Nutmeg’s executive team of the last year or so. Three out of six in the current executive team are new, suggesting Nutmeg’s institutional backers have not been happy. Nutmeg has also had to raise new money only two years after it last asked for cash; it is far from breaking into profit and continues to burn through capital.

    Robo-advice was going to be the next big thing in the investment world. By taking humans out of the process and doing it all online, the concept aims to lower the cost of investing in the stock market, making it easy and affordable for all. An online questionnaire collects the relevant information about the client’s risk profile and income requirements; the technology then creates a portfolio and processes the payments. But what robo-advisors such as Nutmeg failed to bargain for was the high costs of persuading clients to sign up in the first place. Analysts say it is this factor that is denting the business model.

    Travel on the Tube in London and billboards for Nutmeg are everywhere. Prime-time television ads feature cuddly animated characters, Nut and Meg. All this costs.

    This marketing spend is certainly helping Nutmeg win customers: at the end of 2016 Nutmeg was looking after close to £600 million of assets from 25,000 customers. In the first four months of this year, the number of customers grew to 40,000, with more than £800 million of assets. That’s rapid growth indeed, well ahead of some pundits’ expectations — but one good team of IFAs can look after £100 million of assets with costs that are a tiny fraction of Nutmeg’s. To become profitable, Nutmeg needs to grow a lot more. The question is: how much is a lot?

    Michael Wong, financial services analyst at Morningstar, estimates that US robo-advisor ventures need at least $15 billion of assets to break even. In the UK, estimates are lower as the fees charged are higher. But Shaun Port, chief investment officer of Nutmeg, says that a breakeven target of £5 billion under management ‘sounds high… the cost to serve our customers is much lower because we have automated many back-office functions. Our technology platform means we’re much cheaper.’

    Reaching £5 billion, if that’s close to the true breakeven target, would still involve increasing the assets managed more than fivefold. The fact that stockbroker Hungerford was replaced by marketing man Stead says it all. Nutmeg’s focus now is on getting new customers through the (electronic) door. But can they do it before their backers lose patience and sell out?

    In America, some robo-advisors have been bought up by big fund managers. For example, BlackRock has bought FutureAdvisor and Invesco has bought Jemstep.

    Michael Wong of Morningstar says: ‘There is a growing realisation that robo-advisors can’t make the numbers work on their own. As a stand-alone business, it is pretty difficult to become profitable any time soon.’

    And yet another threat looms. It comes from Vanguard, the second-largest investment manager in the world, which launched its Personal Advisor Services two years ago in the US and has hoovered up money ever since: latest figures show it is looking after $65 billion. This is a low-cost service, with a fee of just 0.3 per cent of assets, which offers a personal advisor and online control. In the UK, Vanguard has just launched an online service direct to consumers — incidentally causing shares in Hargreaves Lansdown, one of the UK’s biggest firm of financial advisers, to fall 7 per cent on the news. Vanguard’s offer does not come with personal advice, but its fees are very low, at around 0.29 per cent in total. Nutmeg’s are higher, the majority of its customers paying almost 1 per cent a year in charges. Nutmeg has already cut fees in January, faced with competitive threats, and it may now need to do so again.

    Will Nutmeg survive, or is it about to be bought by one of the giant firms it was meant to disrupt? One thing is for sure — the robo-advice game has turned out to be much more difficult than its pioneers thought it would be.

    But let me give the optimistic last word to Nutmeg’s Shaun Port: ‘Our investors understand this is a long-term game. Half of our customers are brand-new investors and they are not going to be profitable for a few years. But the market itself is absolutely enormous.’