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Robo-advisers will take years to turn a profit - report

Robo-advisers will take years to turn a profit - report

Robo-advisers could take up to a decade to make a profit from their clients, a report into the sector has claimed.

Analysis from IRN Consultants highlighted recent research which showed each new robo-advice customer signed up is losing the company £162.50 on average in the first year and only making £17.50 in subsequent years.

This would mean that client would have to be retained for the better part of a decade just for the company to break even from them - assuming the robo-adviser’s business model doesn’t change.

One of the companies the report pointed to was Nutmeg, whose accounts for 2014 showed revenues of £635,000 compared with operating expenses of £5.9m.

The report also estimated that in the UK, robo-advice accounts for around £150m of assets under management. This represents a tiny proportion - just 0.0125 per cent - of the £1.2trn which the Financial Conduct Authority estimates is invested by retail and private clients.

It is even a small proportion of the £132bn which the report estimates is invested in direct-to-consumer fund platforms - just 0.113 per cent.

The difficulty in establishing just how profitable robo-advice in the UK is highlighted by some companies being still so small they don’t have to disclose accounts.

The report stated: “Robo-finance agents represent a tiny share of the addressable market, with most companies in the UK either not yet filing accounts because of their youthfulness, using small company exemptions not to show turnover in their accounts or generating only small revenues.

“Nutmeg, one of the longer standing players in the market, has sales of less than £1m, for example.”

Nutmeg does not disclose how much it has in assets under management in its accounts, but has said they “more than quadrupled” during 2014.

Wealth Horizon, which launched in 2014, made a loss of £347,000 last year.

Other robo-advisers such as Money on Toast, which was founded in 2012, also doesn’t list its assets under management or turnover in its accounts because of small company exemptions.

The research follows a similar study by SCM Direct, which argued most robos are destined to fail, leaving regulators and ombudsmen to clear up the mess.

IRN Consultants also highlighted the differences between the UK and the US markets, stating firms this side of the atlantic lag well behind that of the US by at least five years.

“The US boasts major automated investment platforms like Wealthfront and online investment advisers like Betterment,” read the report. “Some argue that robo-advice is now the third largest type of advice for the institutional and venture capital sectors in the US.”

Martin Stead, chief executive of Nutmeg, did not respond when asked by FTAdviser how much assets under management the company had.

“We’re here to transform an industry - and doing that means investing in order to grow,” he commented.

“We’ve very deliberately built a robust, scalable business model. This is now enabling significant, ahead-of-target growth during 2016 - both in AUM and customer acquisition.”