Robo-adviceJun 27 2017

Introducing the next phase of the robo-advice revolution

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Introducing the next phase of the robo-advice revolution

Well, not this time, folks. No need. The last month has been a quite remarkable flurry of tech-based activity. So if we must have a theme – and of course we don’t have to, we’re independent spirits and won’t be dictated to, but it does make the time go faster – then let’s make it one of childish, wide-eyed excitement that a sector that has seemed bedevilled with huge project fails and regulatory toe-jam has suddenly burst into life.

Let’s canter through a few of the things that are worthy of your attention if you’re into all this stuff.

A big deal

Firstly, and perhaps most excitingly, the robo-advice sector has burst back into life with a huge investment into digital wealth management mavens and Germans-with-a-sense-of-humour Scalable Capital (disclosure: Scalable is a client of the lang cat). 

The investment, which was partly in Scalable’s recent €30m (£26m) series B funding round, and partly in a direct minority stake, is the biggest corporate investment into a UK-based robo since Nutmeg were favoured by Schroders in 2014.

The figures are secret, but whichever way you look at it it’s a lot of money, particularly when you consider that BlackRock bought a US-based robo, FutureAdvisor, for $150m in 2015. So what gives?

Apart from being great news for the Scalable guys, who are genuinely nice people, this is pretty important for the digital investing sector. Those of us who monitor these things have seen the landscape for venture capital (VC) money harden up in the last six months or so; Nutmeg’s last funding round saw them having to head out to Hong Kong, and as far as we know Schroders hasn’t followed its money with further participation. 

So to see the world’s largest asset manager open the corporate checkbook (note US spelling – I’m culturally sensitive) for Scalable is very interesting indeed.

As an aside, one chap I was speaking to last week – a stalwart of the fintech scene, hipster beard and all – told me that there was no longer particular interest in good ideas from VC investors. The ideas have been had. What gets the premium now is execution and proven distribution.

Provider aims

BlackRock is a remarkable machine of a business. Along with Vanguard, it took something like 80 cents in the dollar of new investment flow in the US in 2016, and currently looks after something like $5.6trn (£4.4trn). To put that in context, the GDP of the UK was $2.9trn in 2015. So BlackRock looks after something like 2 UKs. Maybe we should let it negotiate Brexit.

It does many things extremely well indeed, but the one thing it is not – it can’t be, given its size – is fleet of foot. It clearly sees a benefit in cutting short its own development timescales by bringing in external intellectual capital and capability. That’s refreshing honesty, I think.

The big question is whether the amount of money it’s spent is good value or not and what it’s going to do with its investments. 

There’s no doubt that the amount of money that’s flown around fintech in the last few years is staggering. But, to draw on last month’s column for a moment, we have one provider spending nearly half a billion pounds on a technology upgrade currently. 

Seen in that context, a €30m funding round is small beer, although it is very large in comparison to the sector itself, which is only sitting on around £1bn in the UK. Scalable has approximately €250m under administration across its operations in the UK, Germany and Austria.

The current tech inside robos is super-hot and exciting. But give it five years and that won’t be the case. Everyone will have the know-how to track goals and create a user interface that doesn’t look like it’s from a 1998 Unisure system. Everyone will be able to create individually optimised model portfolios – if they want to. 

And that’s down to FutureAdvisor, eMoney, Betterment, Nutmeg and Scalable Capital, and all the rest of them. What will be left is execution and distribution, which is something the big firms taking positions in these firms are pretty good at.

From one US giant to another

Talking of which, having gorged ourselves on the activities of the world’s largest asset manager, let’s head over the road to… the world’s second largest asset manager. Vanguard is now live in the UK with its FNZ-powered direct offering, and very decent it looks. You’ve probably read about the price, which is low at 0.15 per cent a year with a £375pa cap – and also that there’s no Sipp yet and it only has its own funds. So it isn’t even really a platform. Why, then, is everyone getting so excited?

The reason is that Vanguard has serious form when it comes to hoovering up assets at a rate that would turn James Dyson greener than one of his lurid vacuum cleaners. 

Over in the US, its Personal Advisor Service has almost created a category of its own – a full-on, fiduciary advisory service delivered remotely with a decent front end and Vanguard ETF portfolios for 0.3 per cent all in. It could, if it so chose, do that for free, but it doesn’t have to.

When you have $4trn on your books and 20 million investors worldwide, no-one needs to tell you anything about execution or distribution. Vanguard hasn’t bought a robo over here – it doesn’t give advice at all – but it has outsourced its technology. 

This is only the start of the journey for it over here; I think we could be in for a cracking show over time.

In the last month, I’ve seen a really good demo of Fidelity Personal Investing’s new site, which uses its own front end and Bravura round the back. It’s a huge improvement on the old effort, and though it still has some distance to travel, the basics are now in place for it to regain its mojo in the direct sector. Barclays Smart Investor also looks really good – although it is more complex than FPI – and Santander is also live with its direct platform.

The theme, then, is excitement. Not at amazing intellectual capital – that’s been going on behind the scenes for a long time – but in the first glimmers of real execution in this market. 

As always, the exciting stuff happens in the direct space first – we’ll see if it reads across to advisers in due course. Keep watching.

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