In an echo of the UBS announcement that it was shutting up shop “due to limited near-term potential”, Investec confirmed that “after careful consideration… on the short to medium-term potential for the business, we have reluctantly decided to close the Click & Invest service”.
Now that the dust has settled, let us take a considered view, and assess whether this is symptomatic of the whole digital wealth sector, or limited to one specific part of it, and, importantly, whether the sector is evolving at the pace it needs to.
The challenge for any new direct-to-consumer business, regardless of sector, is acquiring customers economically.
That is difficult. Damn difficult. Especially if you are a start-up with limited backing; the costs typically run to many hundreds of pounds per investor.
Yet ironically, it is the businesses that have the rich parent who appear to want a return on their investment in double-quick time, and who react quickest when the ‘hockey stick’ revenue does not materialise.
If the US and UK market has evidenced anything over the past half a dozen years, it was to tell us that this was never going to happen – a case of unrealistic expectations from day one? In UBS’s case, the hammer fell after just 18 months; in Investec’s, less than two years.
And here is the rub – the very factor that should be a strength (a rich, stable parent) actually turns into weakness when they become prematurely impatient with a new service that is still in development and still going through its growing pains, typically because they have to say something positive about ‘improving efficiencies’ and ‘cutting costs’ to keep the analysts happy at reporting time.
While the digital wealth sector is often trumpeted as disruptive, it has seen some lazy, product-centric marketing.
Despite this, the incumbents have been prodded into considering how they should digitally evolve their business. Some of the newcomers are even beginning to acquire levels of customers and assets that are making the rest of the industry sit up and take notice.
And while some industry veterans may comment that these upstarts have yet to make a profit, they are missing the point, just as the senior executives at UBS and Investec did. This sector is not a short-term profit play; it is all about customer acquisition, customer-centric propositions, and building something sustainable for the future.
Currently leading the pack in the digital (robo) wealth sector are: Nutmeg, Vanguard and Scalable Capital; each of them have a different approach and proposition.
Provider | Customers | AuA |
Nutmeg | 70,000 | £1.75bn |
Vanguard | 55,000 | £1.50bn |
Scalable Capital | 40,000 | £1.25bn |
Source: Altus discussion with providers, May 2019
What many of the players in this sector are learning – fast – is that to be successful, continual development and diversification is key, and this is perhaps the key reason why SmartWealth and Click & Invest did not meet their parent company’s expectations.
To meet customer needs and to diversify the business model, the following are a few areas worthy of consideration:
• Wrappers: particularly adding a pension wrapper. (Note Scalable’s relationship with AJ Bell, and the average investment of £90,000 through pension pot consolidation).
• Cash: still king for many, and propositions that include savings accounts (with a decent rates) as an alternative option to investments are attracting a new range of customers.
• Social responsibility: an increasing number of companies are tapping into this behavioural shift, attracting (younger) customers who have not invested before, including a greater number of female investors.
• Multiple territories: not just UK – for example Munnypot in Denmark, Scalable in Germany and Austria, Moneyfarm in Italy and Nutmeg in Taiwan.
• Business model pivot: away from D2C only, to offer a range of business-to-business/to-consumer services, for example, software as a service, outsource and white label – such as Scalable with ING and OpenBank, or Wealthify accessible via Starling Bank’s marketplace.
• Hybrid advice service: not just self-directed or guidance – as offered now by both Nutmeg and Scalable.
Meanwhile, Vanguard is a stand-out success among its asset management peers, with a proposition that aligns very closely to its core strengths and points of difference; a better known consumer brand among the investor cognoscenti, the champion of low cost, clean, simple and functional – no frills, it just delivers.
Their proposition is appealing to both younger investors – 45 per cent of customers are under 35 – and seasoned investors with sizeable portfolios who wish to benefit from its lower cost D2C proposition.
Understanding the consumer is critical to drawing real insights to better target potential or existing customers with more personalised propositions and services that address their financial needs, and so is using real-time analytics to understand what works and what does not.
For others, the D2C channel is now being used as a shop window to demonstrate functionality and gather consumer behaviour insights that can then be shared with strategic B2B2C partners.
Having a major investment partner is another way the smaller companies are working with big businesses, such as Wealthify with Aviva, Scalable with Blackrock, or Nutmeg with Schroders and Goldman Sachs.
As well as much needed investment to help run the business and develop more functionality much faster, a major partner can also provide access to their existing customer base, or open doors to other potential distribution partners.
These strategies are helping a number of players move from start-up stage to a scale business that can look to make a profit – gaining credibility and no longer the butt of advice company put-downs.
Key points
- Investec announced recently that it was shutting its robo-advice arm
- Setting up a robo-adviser is a long-term project
- Those offering an intelligent range of services will do well in the space
We will see much stronger innovation, with businesses taking more ambitious approaches in search of a winning formula.
The US and China are always exciting, while in the UK, take a look at OpenMoney and reflect on how it differs from so many in the sector. Or look at Goldman Sachs’ Marcus, now with 250,000 UK customers and around £8bn on deposit, achieved in around nine months or so.
Think about how Marcus could potentially evolve: personal finance and debt management? How about loans and protection, or investments?
Maybe add in a hybrid advice service for those that need it, all available to their growing customer base.
Now you have got something that might actually be considered useful and engaging for the many, not just the few.
Importantly, this is creating a proposition that clearly integrates the best that digital has to offer, with the human touch.
Altus is currently tracking more than 100 players along the digital wealth value chain, using our experience to help clients select the right partners to deliver their ambitions.
Some of the robo-adviser 1.0 services will undoubtedly fall by the wayside, starved of customers or B2B partners.
The digital wealth market is here to stay. Not in its current form, I accept; we are still barely scratching the surface of what is possible, the ZX Spectrum before the Mac.
But the component parts are slowly falling into place. Step forward the maverick creatives to deliver true innovation, starting with real customer needs or pain points. The show will go on.
Simon Bussy is director of wealth of Altus Consulting
