Spotlight: Technological growing pains

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Spotlight: Technological growing pains

When grand plans go wrong: A focus on new technology shouldn’t come at the expense of the basics, says Mark Polson.

Our subject this month is what happens when companies who set their stall out in some kind of technological way come a cropper. Our world is now pretty much entirely contingent on tiny bits of silicon, and when it all goes wrong we don’t really know where to turn.

One thing we do know how to do, though, is to turn on companies who are having a problem. Such a one is Samsung. As you’ve no doubt noticed, its new Note 7 phablets have developed an unfortunate habit of spontaneously combusting, much like the drummers in Spinal Tap. 

When something like this happens, a shock goes through the system, and the first thing that happens is that the company in question gets a smack right on the share price. 

Reputational damage

As I write this, the share price for Samsung has dropped from a high of 763p on 7 October to 670p. Analysts are suggesting that this might wipe more than $5bn (£4.1bn) off Samsung’s profit line – for sure it won’t be getting revenue from the Note 7 line any more.

Over in our space, and on a smaller scale, we saw recently that much less glamorous technology can also come back and bite you. 

We’re talking here about the behind-the-scenes heavy lifting that no human being (at least no-one in their right mind) would want to be involved in. Aviva found itself in hot water with the regulator over control failings around client money and assets, and on the wrong end of an £8.2m fine. 

This wasn’t enough to really hurt the share price – Aviva lost 10p the day after the announcement, but had regained it within a week. And what happened here wasn’t that anything caught fire in a physical or metaphysical sense. 

No-one lost any money, assets weren’t commingled (the 11th deadly sin) and there isn’t even a suggestion that monkey business has been going on. 

No, what did for Aviva is that its admin outsourced arrangements, which rely heavily on tech to do all of the heavy lifting, weren’t under proper control. That is to say, Aviva couldn’t say with certainty that everything was hunky dory because the right controls weren’t in place. 

In both these cases, big and small, it isn’t just the immediate commercial impact of a revenue hit or a fine that really hurts a company. It’s the impact on trust. And that can take a lot longer to come back than revenue lines. 

The trust thing is interesting because it’s keyed to our assumption that technology just works. We don’t particularly want to think about it – normally our frustrations with a company will be in our human interactions than in our technological ones. That’s why Samsung and Aviva will take hero measures to keep things on an even keel – withdraw the product in Samsung’s case, invest in new teams and resource in Aviva’s.

Human vs computer error

I’ve been thinking about this nexus of human and computer a lot recently over in the direct investment space. We have been treated to a couple of interesting developments in the last month, which are worth a wee investigation.

Firstly, Vanguard has announced that it will be launching a direct to consumer (D2C) offering within the next three to six months. This is a sort-of-not-really UK version of the Vanguard Personal Advisor Service from the US. We’re not sure if it will include advice from a human; we expect some kind of algorithmic risk matching that might be called advice. 

We expect LifeStrategy to be under the hood. Opinion is split on whether there will be a pension wrapper included – we hear a rumour that it won’t be there at launch. The price is expected to be well under 50bps all in, maybe as little as the cost of the LifeStrategy fund plus 10bps or so.

If that’s true, then an investor in a passive multi-asset fund can get out for, say, 40bps all in. That’s going to hurt direct to consumer shops like Hargreaves Lansdown, but it may also be of interest to advisers. Why would you ask a client to bear a (say) 35bps advised platform fee when they can just hold it direct on Vanguard’s platform? If the answer is ‘facilitation of adviser charges’ then that might be something you want to have a think about.

Vanguard can deliver all this partly because it’s huge in the first place, but also because it’s letting technology (FNZ, in this case) take the load. But that isn’t enough. 

Customer costs 

In the online world, it isn’t necessarily operating cost or the cost of building tech that hurts – that can be dealt with over time (which is something that folk worried about tech spend from platforms should probably remember). It’s the cost of acquiring customers, each of which gives you just a little bit of revenue. It’s crucial to control your cost per acquisition (CPA).

We can see an example of this at the moment with that bellwether of the robo-advice market, Nutmeg. We like Nutmeg – it’s been around since 2011, it does funny adverts, its user experience is really nice and its new pension proposition, developed with Embark, is straight through and pretty sexy. We don’t like its price much, but then we’re like that. 

Nutmeg’s numbers for 2015 are out, and make fascinating reading for anyone interested in this part of the market. Here are the basics: That is challenging reading. Nutmeg is five years into its journey, and its revenue is still at the level many adviser firms would recognise from their own businesses.

Operating expenses are high, headcount is high, and it either has to up revenue very quickly in 2016 or it will need reinvestment soon. In truth, both will probably be required.

Robo-advice

So that’s a reality check for anyone thinking that robo-advice is a way to get rich quick. But it’s not what matters to us today. Nutmeg made big strides in 2015. Its customer numbers were up by more than 50 per cent, AUA by more than 100 per cent and AUA per client is up more than 35 per cent. 

Even with that, we calculate that its CPA is near enough £1,000 per client (if you want to see our numbers give us a call). We could be wrong by half, and it would still be £500 per client, and that’s just too much. 

We’re looking at a world in which a fintech business needs clients to hang around for anything from seven to 13 years to make itself profitable. That, too, is just too much. And if Nutmeg starts to wobble (we expect and hope it will be fine) then the shockwaves round the robo-advice market will be remarkable.

The real message in here is that whether you’re making phones, running a massive insurance company or a fintech startup, you can’t take your eye off any element of what’s going on. 

When you ask people to interact remotely with intangible services, you need to think very carefully about what the constituent elements of trust are and keep your focus on them. We don’t need a Note 7 in our space, thanks very much. 

Mark Polson is principal of platform and specialist consultancy the lang cat