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Online wealth managers like Nutmeg claim to have brought investing to the masses by enabling customers to manage low-cost portfolios from their iPhones as easily as they could order a takeaway.
The platform revealed this week that it now has more than £1bn of assets under management — but its growing popularity is coming at a cost.
Nutmeg is one of the crop of digital robo-advisers offering off-the-peg passive investment portfolios assembled using ETFs. The “robo” tag is applied due to the automated process of self-selection. Investors fill out online questionnaires to gauge their risk appetite and guide their choices — a much cheaper process than paying a financial adviser or using the discretionary portfolios offered by wealth managers.
Nutmeg told the Financial Times it has doubled its customer numbers in under one year from 24,000 at the end of December 2016 to 49,000 at the end of last week, growing assets under management by 67 per cent over the same period from £600m to £1bn. Since September 2016, Nutmeg has grown assets by 92 per cent, from £521m to £1bn.
Despite its growth, privately owned Nutmeg has yet to turn a profit. Its latest results show losses are widening — reaching £9.3m on turnover of £2.56m in the year to December 31 2016, according to accounts filed with Companies House in September. A year previously, the company reported losses of £8.9m on turnover of £1.72m.
|Platform||Annual fees, plus estimated fund costs (£)|
|Hargreaves Lansdown balanced growth portfolio||1,900|
|Source: Company websites; *Includes trading cost estimate|
Robo-advisers make less money from fees than traditional wealth managers, so their business model relies on signing up large numbers of customers. But recruiting new customers is an expensive business. Nutmeg’s operating expenses rose 10 per cent to £11.9m year-on-year in 2016, and the platform spent nearly half a million pounds more on development costs including marketing and new technology.
As the platform expands, the average amount invested by each Nutmeg customers is falling, from £25,000 last year to just over £20,400 today. Nutmeg says the fall is due to April’s launch of its Lifetime Isa, which has a £4,000 annual subscription limit.
Chief executive Martin Stead, who took over from founder Nick Hungerford in May 2016, said: “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.”
Mr Stead insisted that Nutmeg is not just the preserve of cash-strapped millennials.
“The rest of the industry chases after the wealth, but we provide solutions that appeal equally to everyone,” he said.
“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.”
According to research conducted by consumer financial website Boring Money, it costs robo advisers on average between £200 and £500 to acquire each new customer. Founder Holly Mackay said: “Low ongoing charges, combined with high upfront acquisition costs, mean that revenues might never cover the costs of acquisition.”
|Platform||Assets under management||Market share|
|Other DIY platforms||£54.6bn||28%|
|Source: Boring Money, UK non-advised online investments|
And while Nutmeg is growing fast, total assets managed by robo advisers are barely a drop in the ocean when it comes to market share. According to Boring Money, robo advisers accounted for less than 1 per cent of the UK’s £192bn non-advised online investment market at the end of the third quarter of 2017.
By comparison, online fund supermarket Hargreaves Lansdown has a 43 per cent market share, revealing last week that it now has more than 1m customers on its books.
“Digital and mobile strategies have been key to our success,” said Chris Hill, chief executive. Nearly 60 per cent of visits to the Hargreaves website are now made via mobile and tablet, compared to less than 20 per cent five years ago. Over the past two years, fund trades made by mobile have almost quadrupled.
However, Boring Money’s Ms Mackay said it is unlikely to be a “winner takes all” market.
“People usually allocate a small chunk of money to test out a robo and have a play pot of money invested there, but their pension and serious assets somewhere else,” she said.
“Cash flow is the crippling issue start-ups have to deal with, and the costs of acquisition are so high. I think very few of the smaller robo brands will make it. Nutmeg has the first-mover advantage and they have a good opportunity, but I have no doubt that the vast majority of smaller brands will be acquired by bigger brands.”
Many of the key robo players are backed by a major asset manager.
Scalable Capital, which has 15,000 customers and hit €500m (£445m) in assets under management this month is backed by BlackRock. Schroders bought a stake in Nutmeg in 2014 and in October 2017, Aviva threw its weight behind rival robo Wealthify, which has 11,000 customers with portfolios ranging from £1 to “tens of thousands” according to the company. Moneyfarm has been backed by Allianz since September 2016.
Robos also face growing competition from high street banks. This week, Royal Bank of Scotland said it was launching a robo-advice service for more than 5m customers under the NatWest brand which will offer automated advice and investment plans tailored to customers rather than off-the-peg portfolios. HSBC said in June that it would offer personalised online investment advice later this year for those with smaller savings pots.
Ms Mackay said: “It will be interesting when the retail banks start delivering their own robo solutions because that really will be mass market. People who are less confident about investing are more likely to invest with their bank.”