The Financial Conduct Authority (FCA) should be looking at whether the business models of fintech firms “make any sense” as the businesses operate in a “fantasy world” according to Alan Miller, founder of SCM Private.
He accused fintech companies of operating business models that do not add up.
Mr Miller said on his blog the latest financial results of robo-adviser Nutmeg and other companies in the fintech arena leave him wondering whether there is a sustainable target market for the services they offer.
“UK robo advisers are wired to lose money, and most will go bust before acquiring the sizeable assets under management to ensure their sustainability,” he said.
“Surely the FCA and the Treasury should be looking at UK robo-advisers to test whether their financial models make any sense.
"If the answer to such analysis is 'no', is it not irresponsible to allow mainly novice investors to have their money managed for the medium to long term, by companies who may well not exist in years to come?”
Mr Miller drilled into the numbers and said the company’s employment costs in 2016 were £5.3m, which is more than twice the turnover achieved by the company in that period, of £2.55m. That is before other costs are considered.
Nutmeg has had four full years in business and it is typical for start-up companies to lose money in the early years.
Mr MIller's own firm, SCM, is also loss making, with a deficit of £155,000 for the year to April, on a turnover of £353,000. The company also lost money in 2016. It has existed for longer than the robo-advice firms.
Nutmeg has cash in the bank of £27m, according to the latest set of accounts, which implies the company could sustain losses at the current level for three years, without any improvement in the financial position.
Nutmeg said it is likely to want to raise more money in the near future.
Major asset management firm Schroders is among the current backers of Nutmeg.
Mr Miller’s firm SCM is a wealth and investment manager, and so may view Nutmeg as a competitor.
But Mr Miller claimed the robo-advice model as it currently stands is fundamentally flawed.
“One of the central issues with the UK fintech models is their reliance on smaller accounts – Nutmeg managed £600m for 25,000 clients i.e. an average balance of £24,000 as at the end of December 2016.
"To put it into context, Nutmeg charges between £108 and £180 [per year] for a £24,000 account, depending on whether a customer opts for the fully managed or fixed allocation portfolio.
"Based on its recently reported costs and number of accounts managed, salary costs alone work out at £214 per account, and overall accounts at £478 per account.”
He said Nutmeg is not alone in racking up losses, with rival firms Moneyfarm and Netwealth also reporting steep deficits.
Speaking to FTAdviser straight after the results announcement, Nutmeg defended its business model, saying it had doubled its number of clients in the first half of 2016, and grown assets under management to £900m.
Moneyfarm has a partnership with Allianz, and said it expects to be profitable by 2019.
Martin Stead, chief executive of Nutmeg, said: "Nutmeg has long-term committed backers and we are well on our way to building a business of significant size; any analysis that doesn't take into account what a fully scaled business will look like is fundamentally flawed.
"We have doubled our customer numbers over the past year, significantly grown assets under management and are continuing to invest for rapid growth.”
David.Thorpe@ft.com
