Robo-Advice 1.0 Destined for the Scrapheap?

2016-05-05 |  Leo Chancellor

Is the news that Nutmeg’s co-founder and CEO is handing over the reins to their chief revenue officer, an ex-sales and marketing man, an indicator of the issues that start-ups in the digital wealth management space were always going to face? Given the start-up firms/brands that could be bundled together as “disruptors” in this market all appear to have a similar proposition, it is likely they will all suffer similar challenges as they try to establish a foothold in the UK wealth market.

Handing over control to a CEO with a sales and marketing background alludes to the biggest challenge these firms are facing today - building a reputable brand from scratch that investors will be willing to trust with their hard earned savings - no mean feat starting from obscurity.

It is argued the target market for these firms is the millennial investor, or “Henry” (high earner, not rich yet, to use the US market jargon) and that for this segment, a strong, well established and trusted financial services brand is not so important. Investors in this segment are said to be more concerned with ease of access and results at a palatable cost.

Maybe that’s true, but you’ve still got to get your name out there and explain what it is you do in an easily digestible and non-patronising fashion.

If we agree that the target market for robo-advisors of the Nutmeg variety is indeed the millennial investor, a little bit of thought on the size of this segment helps to illustrate the massive customer acquisition mountain looming over many of these firms.

Let us start from the premise that it is probably not just millennials interested in the products these firms offer and assume that the bulk of demand probably comes from those between 22 and 39. The 20 somethings in this bracket earn on average around £21k and the 30 somethings around £29k on average. So, we’re unlikely to see the “average” investor from these age groups accumulating a sizable pot through a robo-advisor. This points to a firm needing to invest an enormous amount of effort in acquisition of a large number of “average” investors to make the model pay or, focus on acquiring the higher earners in this age range.

However, discounting pensions (on the assumption your average millennial is unlikely to have thought about a pension outside of what their employer provides) and just focusing on ISAs, government data suggests the following; in 2014-15 there were approximately 12.5 million ISAs subscribed, but only just over 2 million (c.3% of the UK population) of these were of the investment variety, and overall, average subscriptions were around £6k, well below the limit available. And with the limit on ISA savings now headed to £20k, data suggests the number of investors who actually have the capacity to make use of this in full (those higher earners mentioned above) is tiny.

The point is that for those firms focusing on pure robo-advice, under a new brand, the number of ideal target customers is very small and they are probably already served by an incumbent financial institution in some way. They are therefore, unlikely to consider investing their whole pot through robo-advice and are likely to be very sensitive to the potential for poor performance, given the lack of performance history robo-advisors will tend to have.

These are some of the key reasons why we believe that pure robo-advice whilst offering something a little more exciting as a savings proposition to the millennial investor, is not likely to emerge as a winning proposition and there are some serious questions around the long term sustainability of firms just offering a robo-service. We have recently compiled a report on the impacts of robo-advice on the UK wealth market in collaboration with Judge Business School and developed a view on what the winning propositions for robo-advice will be and we’ll be sharing more on this over the coming months. If you’d like to wax lyrical and/or hear our views on robo-advice in the meantime, please do get in touch!