What does the future look like for Nutmeg and JPMorgan Chase?

The popularity of platforms like Nutmeg was highlighted in a study by GlobalData last year, which found that although robo-advice holds a relatively small market share in the UK – with just 3.4 per cent of retail investors preferring to use this channel to arrange investments – its growth has been substantial, and in an increasingly digital-centric world this trend will only continue.

Following the acquisition, Nutmeg is intended to complement the company's new digital bank, which is planned to launch in the UK later this year under the brand of its US retail offering JPMorgan Chase. 

So what is in this deal for JPMorgan and Nutmeg?

A sigh of relief that their future is now secure and the focus, at least for a while, will move on from the ‘they’re not making any money' Simon Bussy, Altus

JP Morgan has said Nutmeg's customers and the products and services they use will be unaffected. Meanwhile, over a period of time, JP Morgan will work with with Nutmeg to integrate products and teams.

Nutmeg chief executive Neil Alexander also stressed that its customers can continue to expect the same level of transparency and convenience.

Simon Bussy, director of wealth at Altus Consulting, says following the acquisition there will be "sighs of relief" and "big smiles" in Nutmeg.

“A sigh of relief that their future is now secure and the focus, at least for a while, will move on from the ‘they’re not making any money, they’re destined to go the same way as all the others, anyone can run a business at a loss’ type comments that have filled the trade press," Bussy adds.

“Big smiles that they will, in time, be part of a proposition much bigger, much better, than anything they could have achieved on their own, and will have the serious investment backing to help accelerate their own plans.”

For a business like Nutmeg to have success with a direct-to-consumer proposition it needs to build a trusted reputation or brand, achieve scale and a good reach, all of which need to be done with deep marketing pockets.

The marketing ‘burn rate’ to acquire customers at Nutmeg has been well reported, but its number of customers continues to grow – latest figures stand at 140,000 – while it manages assets of around £3.5bn.

For JPMorgan, the purchase provides a ready-made investment solution to complement its planned retail banking operation for the UK to be rolled out later this year.

It has not taken years in the making for JPMorgan to acquire this number of customers: there have been no aborted projects and no going through the early growing pains that Nutmeg and every other digital service has to go through, to survive.

And besides JPMorgan knows the Nutmeg business very well: both partnered together to launch a range of exchange-traded funds exclusively for Nutmeg's robo-adviser customers last year, while Shaun Port, Nutmeg's chief investment officer, left the company after seven years to join JPMorgan in 2019 as managing director.

Bussy adds: “A hybrid model has emerged as a clear favourite to succeed; the new venture will certainly have the cash to really hone in on whether it wishes to offer advice, guidance, DIY or a combination, to meet the needs of its customers, and whether advice-based algorithms rather than just human advisers will be a part of that future.”

When it comes to embedding the Nutmeg business into JPMorgan, Sergel Woldemichael, wealth management analyst at GlobalData, says as Nutmeg caters more to less affluent consumers, this will fit well with the target market of the digital bank. 

“However, as Nutmeg falls under the JPMorgan brand, which is known for catering to the wealthy elites, the challenge will be remaining relatable to the less affluent and upholding Nutmeg’s reputation with this demographic,” he adds.

“We’re of course yet to see this play out but, as we know, Nutmeg is set to be part of JPM Chase's new digital bank that will be launching in the UK. The digital bank will be a one-stop shop for consumer finance, offering a range of products with Nutmeg’s service complementing the investment aspect.”

Meanwhile, Bussy says he expects that in the short term Nutmeg will be run as it is, but in the medium to longer term there are a range of questions that will need to be answered that will drive the success of the business, and the wider retail banking proposition. These questions will need to address the following:

• Systems integration: easy to say, more difficult to execute, but an absolute must do if the new venture really is to be greater than the sum of its parts. 
• Culture and people: the start-up and the big American beast; will they fit together harmoniously, or will both get frustrated with the other after a period of stabilisation?
• Brand: will the Nutmeg label be kept in the long term or replaced with JPM or a new brand that appeals more directly to customers of the new digital operation?

Ian McKenna, founder of FTRC, says: “The question is how can you take Nutmeg to the next level – that’s the challenge. Even if [JPMorgan Chase] is not going to do it now... they will need to add something that is sophisticated in a market where the big boys are beginning to play, and this deal validates that."

While the acquisition of digital trading apps has become a popular trend, it has not been a success story for all, as some larger institutions have closed down their robo-advice businesses.

Bussy says the challenges concerning the cost of acquisition for these companies has been well reported: making it a double-whammy when you add into the equation the relatively low portfolio sizes and the low fees being charged.

These businesses need really deep pockets to survive, or very rich and patient investors/parents.

“In many cases time and money literally runs out,” Bussy adds. “Investec Click & Invest and UBS SmartWealth suffered the same challenges as others – lack of clients. 

“Interestingly they both tried, at least initially, to appeal to a much more affluent client, with a minimum investment of £10,000, but ended up being in no man’s land and not appealing to anywhere near enough consumers to make a real go of it.”

Like Nutmeg, the likes of Wealthify, Scalable Capital, Moneyfarm, Wealthsimple all started as fintechs rather than having institutional parents, and all have now secured the backing they require.

“Importantly, all recognised that a D2C-only model would not be sustainable, and each now support strong B2B(2C) services, too. In the cases of Scalable and Wealthsimple – B2B(2C) is the dominant model. Other tech-based firms recognised much earlier that B2B would be the right way to go: Evalue, Ignition Advice, and Wealth Wizards are good examples,” Bussy adds.

For some robo-advisers like Nutmeg that had recognised the limitations of the model, they sought to hire financial advisers, to create a more hybrid proposition.

Woldemichael says: “Demand and usage of automated investment services are on the rise across all affluent groups, so meeting this demand is necessary. 

“But the hybrid approach is the winner. Although investors are warming towards algorithms managing their wealth, they do also want access to a human adviser to help meet emotional needs among other requirements. Hence, many robo-advisors have added a human aspect to their proposition, including Nutmeg.”

Bussy says: “There will always be groups of customers who like to do things themselves, just as there are those who need a bit of guidance or even advice. The move to a more hybrid model is nothing new – businesses such as OpenMoney in the UK and Personal Capital and Vanguard in the States recognised the reassurance of an adviser should be integral to the proposition.

“Others have introduced advisers into the mix after initially being fully automated only. Interestingly, Wealthify has stood firm on this one; it will be interesting to see whether the Aviva-backed proposition follows the crowd or retains its differentiation, and whether this differentiation wins clients in a crowded space.”

M&G Wealth is one major provider to have recently announced plans for a hybrid proposition, underpinned by Ignition Advice technology that sits within the wider M&G Wealth business, flanked by their partners providing face-to-face advice for more complex situations, and a pure digital experience under the M&G Investments brand.

Heather Hopkins, managing director of NextWealth, says being backed by a larger company can be really important for credibility for consumers, and that the hybrid approach enables advisers to concentrate more time on interacting with the client. 

“The potential for hybrid advice is to automate a lot of the things being done in a financial advice business to support the advice process, so advisers can work with more clients and focus on the activities that allow them to add value, like behavioural coaching, really understanding their client goals and needs, rather than chasing information from providers.”

Bussy adds: “From conversations I’ve had right round the industry, the demand for digital – whether that be tactical digital capabilities through to new channels or complete digital transformation of a business – has never been greater, and the pandemic has been a real catalyst for that."

“Consumer behaviours have changed in the past 15 months, and businesses are responding. While digital solutions are in demand, the reassurance of a human – whether that be a friendly support person or a qualified adviser – is increasingly seen as an entry-level requirement.”

Ima Jackson-Obot is deputy features editor of FTAdviser