Last month’s demise of Moola, a digital investing firm launched less than three years ago and part of insurance and benefits giant Marsh & McLennan since 2018, casts a shadow over the future of digital advice as a concept.
The service was as simple and intuitive to use as an iPhone. Originally fronted by founder Gemma Godfrey, a regular on TV and radio with a flair for presenting complex ideas simply, Moola was arguably one of the best-placed digital start-ups to succeed.
Yet with fees of 0.75% plus investment costs (about average for digital-only discretionary investment), and typical customer acquisition costs in this sector in excess of £300, reaching break-even has clearly proved impossible.
Keeping pace with the market proved a further problem. Competitive offerings launched since have offered more in terms of personalised advice, and for similar fees. Moola was starting to look like one of the pack, and following Godfrey’s departure, even the differentiator of communications was lost.
Moola is not the first to succumb. In 2018, ‘SmartWealth’ from UBS closed its doors in the UK, followed last year by Investec’s ‘Click and Invest’.
Meanwhile Nutmeg, the UK’s largest online wealth manager and part-owned by Goldman Sachs, experienced widening losses last year despite growing its customer base by 50%. Now nearing £2bn of assets under administration, the firm expects to reach profitability by 2022. This gives us some idea of where the break-even bar lies, and suggests further closures are inevitable.
When is robo-advice not advice?
Digital investment platforms tend to be lumped together, but in reality, there are three distinct types in a very crowded market.
- Traditional D2C platforms like Hargreaves Lansdown and Interactive Investor don’t pretend to be robo-advisers, although some offer separate paid-for advice services, and almost all offer guidance (with varying degrees of success!).
- Digital investment advice platforms (like Moola) are effectively a low-cost DFM, where the platform offers you a portfolio from a small range and keeps it rebalanced. Usually you choose your investment horizon and risk appetite on a sliding scale rather than completing a risk questionnaire.
- True digital financial planning platforms (such as MyEva), which offer personal recommendations on the appropriate products and actions to meet your objectives.
It’s the middle segment which is most under threat, which is a shame as their simplicity should be a strength in the complex world of investing.
The challenges – brand, distribution and scale
These three key challenges to profitability are intrinsically linked. When you’re charging under 100 basis points, with typically 20bps for fund and ETF fees, to reach profitability you need to achieve scale of assets. This can’t happen without a distribution strategy that works, not a field of dreams where, ‘If we build it, they will come’.
As Nutmeg has found, many millions spent advertising on the tube can buy you brand recognition and a spike in new business, but this effect is temporary.
And who are the investors in this target market? If you’re targeting the advice gap, it’s mainly the mass market, most of whom don’t bring large portfolios with them.
Many digital platforms still don’t offer a pension, and most robo-advice players have yet to properly solve the more complex at-retirement advice gap.
Without large numbers of investors transferring in their savings pots, reaching scale and profit will be a waiting game. Can any of these start-ups survive long enough as they wait for regular savings to grow into billions?
As we can see, for some platforms, their investors are starting to question the very business model behind robo-advice and having to make some hard decisions.
Is there a quicker way to profitability?
With GDP per capita around 50% higher than the UK, and six times the population, the US also has a more established self-investor culture. Individuals are used to having to select stocks and funds in their 401k pension plans, and this creates a fertile ground for seeding a new robo-advice business. Nonetheless, the two most successful players in this market are both household names.
Charles Schwab launched its Intelligent Portfolios service in March 2015. By the end of last year, the platform had amassed $43bn through a strategy of zero platform fees. The client only pays ongoing investment charges from its range of Schwab funds and ETFs (all sub-20 bps), plus a small commission on any ETF deals. By being the first no-fee service, this created a real differentiator and has allowed the firm to build scale in a relatively short time.
Vanguard, meanwhile, has accrued in excess of $150bn of assets on its Personal Advisor Services robo-adviser platform. In addition to low fees (30bps or less), the differentiator here is the introduction of a human adviser between the customer and the technology. This addresses the trust issues to encourage uptake of the services.
Vanguard have announced they will be developing an advice offering to the UK, to complement their successful ISA and soon-to-launch SIPP for self-investors. Given their ethos, you can bet it will be low-cost, and there is every reason to believe they will succeed where many others have failed.
Traditional advisers will need to focus more than ever on their value-add financial planning services. But above all, Vanguard poses an existential threat to the existing digital platforms as they vie to recruit their next generation of customers.
Some are already adapting their business models to offer financial planning and workplace solutions, as well as B2B services, in an attempt to build scale. The big question is, how many of them will be left after the bloodbath?
This article was first published in MallowStreet on 7th February 2020.
