The UK’s largest online manager is venturing out to become a real player in the wider market with a financial advice offering. But, can this new fixed-fee planning service win over clients?
Fresh off the back of a £12.4m loss last financial year, online investment manager Nutmeg has announced it is introducing a low price, fixed-fee “advice” service in the hopes of harvesting a profit.
As one of Europe’s first robo-advisers, and with a colourful history of criticising the costs and services of traditional advisers, the new Nutmeg offering will be a large-scale test of how feasible hybrid models really are.
Nutmeg has acquired £1.5bn in assets since launching in 2011 and is the UK’s largest robo-adviser. Despite this, the profitability issues which have plagued the business since it began have seen it post widening losses in each of the past two years despite growing revenues.
With Lloyds Bank’s long-held plans to launch a robo-service on the back burner, the timing of Nutmeg’s new venture is telling. The robo is heavily backed by asset management giant Schroders, which recently entered a new financial planning partnership with Lloyds.
There is plenty customers will find positive about a hybrid offering, but many in the industry have already cast doubt on whether the venture can turn a much-needed profit.
Money Marketing spoke with Nutmeg to get a full breakdown of the new advice offering, as well as the wider market to see whether the robo-firm can become a genuine player in the advice space.
Who are the targets?
Nutmeg is going after a specific customer base, saying its service is likely to only be appropriate for customers in the following circumstances:
• Not in a position where debt needs to be reduced
• A “reasonable” lump sum of money is set aside for emergencies
• Hold enough money to meet immediate financial needs
• Have appropriate insurance
• Have spare income or capital to invest when all other factors are considered
A cut to the costs of advice
Nutmeg’s move into “advice”, rather than just operating a DIY investment platform, follows a growing number of low-cost automated investment initiatives in the wealth management market.
Advice firms continue to consolidate or partner with technology providers, while many of the big banks continue to toy with the idea of integrating face-to-face financial planning back into wider offerings.
Nutmeg’s advice proposition will include a free initial consultation followed by a £350 charge for recommendations – a fee far lower than the £1,000 to £4,000 annual cost Nutmeg quotes for traditional advisers. Nutmeg will naturally utilise its own range of portfolio services, investment and pension products.
Nutmeg head of financial advice Lisa Caplan says that advice sessions begin with a 20-minute online fact find after which a risk-reporting exercise is carried out by Nutmeg’s team of staff. Clients are then issued with a suitability report outlining advice recommendations.
The offering is self-identified by Nutmeg as a “one-off service”. Reviews are not carried out on products, and reviews requested by customers will be charged as a new round of financial advice for a further £350.
Rennison Consulting director Roderic Rennison is positive that the charging structure can be successful.
He says: “It’s perfectly appropriate to charge again as long as they are clear. Beyond cash ISAs, many people want access to something to confirm what they are doing, so Nutmeg is providing for those people who perhaps don’t need that advice and don’t need to pay; it offers an alternative which could provide them value.”
Gbi2 managing director Graham Bentley says an offering without the promise of ongoing management and the “planning” aspect of advice should not be defined as such, but Caplan is confident many clients do not want that full service.
She says: “There are plenty of circumstances where many people have a straightforward question or need, and want a simple one-off piece of advice in return for an affordable fixed fee.”
For £350, Caplan says Nutmeg will not advise on defined benefit pension transfers, but will advise on consolidating multiple pots.
There are also no plans to offer mortgage advice, though Caplan says the idea is “under review” and will be dependent on client demand.
Trust planning, tax advice, wills, decumulation planning, protection and specific later life services are also not included in Nutmeg’s offering.
Bentley says: “Customers could go to Interactive Investor and pay significantly less for a similar arrangement. It does not feel to me like any advice is going on because the core skills of Schroders, Lloyds and Nutmeg are not financial planning. People are bandying around the phrase and it’s not financial advice, it’s instructions on how to construct a portfolio which most people can go and do themselves with a little bit of work.”
Caplan confirmed to Money Marketing that Nutmeg will inform clients that they would benefit from those services if appropriate and would expect to cover whether or not that was necessary in an initial conversation before the £350 fee is paid.
She says: “My team and I assess the information given and have an initial conversation with the customer to make sure we are clear on their situation and goals, and to discuss how we can help.”
Nutmeg is the start of a leap forward for advice
Nutmeg’s move into financial advice needs to be seen in a much wider context. Last week, US robo-adviser Wealthfront launched a service which uses machine learning to answer more than 10,000 financial questions at the same time as they announced a partnership and integration with Intuit, the tax planning and accounting software providers.
Also in the US, Betterment has been offering retirement planning tools for some time and the whole Personal Capital proposition is built around providing a wider advice service.
United Income even provides a self-service financial planning tool for clients investing up to $300,000 (£230,000). It is entirely possible that we will see financial advice services delivered free of charge by digital advice providers. It could be argued that RDR precludes such cross-subsidies, however, would the FCA actually want to prohibit genuinely free financial advice?
If you are using technology to deliver detailed analytics it can drastically reduce the cost of delivering the advice. Typically, the UK runs three years behind the US in these developments, but this gap is shortening. There are systems due to launch in the UK next year that can provide very powerful analytics as a foundation for advice.
These include decumulation advice and will be targetted at consumers in the 50-70 age range.
Some of these systems are designed to be capable of providing regulated financial advice on amounts well under £1,000. This could make advice accessible to millions of consumers who need it but cannot currently afford it.
The key issue for advisers is to identify how they can work with such systems to deliver a personalised service while leveraging computing power to do the heavy lifting.
Ian McKenna is director at Financial Technology Research Centre
The portfolio proposition
Nutmeg previously placed its customers’ assets in one of a series of readymade fund portfolios after they filled out an online questionnaire.
Now, asset allocation, fund selection, trade execution, settlement and custody for Nutmeg accounts are set to be undertaken in-house as part of its advice service, with customers able to hold both managed and fixed allocation portfolios.
A Nutmeg statement says: “Within Nutmeg’s fixed allocation portfolio service, where active decisions are not taken by the investment team, the investment team is responsible for portfolio design, periodic review and portfolio balancing.”
The robo’s breakdown of its service says UK and non-UK exchange traded funds, collective investment schemes, UK and international equities and fixed interest securities, including bonds, may be included in customers’ portfolios. Instruments included will not be limited to this, however.
Bentley says this portfolio construction model is likely to be feasible only in an environment where savings ratios are high.
He says: “It would have more of a chance but we’re in a low-return environment and people have less excess money than ever before to stick away to save. Savings ratios are now 4 per cent or similar and people don’t have the propensity to save, so if you’re running a business off that belief, you should probably be slightly concerned.”
Head to head: Is Nutmeg’s offering needed?
There is an advice gap. Whether it was entirely caused by the RDR is open to debate but some of the gap must be down to the changes imposed by RDR. Advisers are in business to deliver their professional services at profit.
The price of those services has risen massively as a result of a whole host of costs. Technology can help to make advisory firms more efficient, but it costs in the short term to invest in technology. Organisations like Nutmeg are now introducing an online advice offering at low price. Whether or not they can make this profitable – and the jury will be out on that for a long time – it will take an enormous amount of traction. They should at least be applauded for their innovation.
There’s nothing cheap about financial advice. When I heard about the Nutmeg offering, I was reminded of the poster displayed in our local motor parts store, before it shut several years ago; you can have it cheap, you can have it fast or you can have it good – choose any two. If you attempt to give financial advice at a low price point, there’s inevitably going to be value missing from its delivery.
What is Nutmeg proposing to leave off the plate in order to come in so cheaply? The reason we charge a flat-fee of thousands of pounds when we give financial advice to our clients is we do the whole job. It’s the whole job that makes the advice valuable and worthwhile, rather than which portfolio we recommend.
Starting from the bottom?
Concerns have been flagged among advisers and consultants as to whether an unprofitable firm should make such a risky entrance into a well-established financial advice market given the strength of the competition.
Industry giant Hargreaves Lansdown has close to £100bn in assets under management, generating a £219m profit in the first half of this year. By comparison, Nutmeg will start its venture with just £1.5bn.
Consultant Malcolm Kerr says: “Nutmeg stands very little chance at making any inroads into the market it is attempting to penetrate. The whole essence of this business runs off the idea that no one needs advice from face-to-face advisers, but compared to that, they’ve been unsuccessful.
“Because they have massive costs in terms of customer engagement, plus a small number of clients and limited AUM, it strikes me as being very challenging for them to be able to break through into making a profit.”
Bentley’s expectations match Kerr’s. He says: “This is a struggling business that is clutching at straws a bit and it’s simply conflating investment management with financial planning. If you have credit card debt or student debt, then presumably they won’t take you on and to make sure their back is covered, the approach is to say their target market is people who have no debt, and if it was £1m someone wanted to put in, then £350 will feel reasonable, but that’s not the sort of person likely to go to Nutmeg.”
Caplan confirms Nutmeg is considering launching video meetings, but there are no immediate plans to offer face-to-face advice.
Caplan says the model of a video meeting is “more aligned to how people interact with other aspects of their life” and that it was designed to fit Nutmeg’s customer base.
However, Kerr notes: “It will be challenging for Nutmeg to recruit any advisers because those advisers would be joining an organisation that has always been rather critical about those who give financial advice, so when it comes down to the culture of the business, it’s likely it wouldn’t be that comfortable for them.”
Forty per cent of Nutmeg clients are first-time investors, compared to 60 per cent with prior experience.
Rennison says accumulators in their 30s could have the potential to be a strong customer base as their needs are more complex than those of millennials, but less so than those who are in drawdown.
He says: “People in their 30s are probably confident enough to make decisions with some advice that’s paid for on a fixed basis as long as there is some access online or to telephone support.”
A free portfolio review service on investments held outside Nutmeg will probably also grab customer attention. Caplan says the service will include advice on investments held with other advisers, private banks or trading platforms and include asset allocation, sector exposure and currency exposure.
She says: “Nearly two million adults in the UK would not consider investing because they do not know where to start and the majority of those investing said it would be useful to have help picking the right investment. Our advice service is about helping all people with financial planning, not just those with hundreds of thousands of pounds to invest.
“Everyone should be able to access high-quality advice, so that they can understand their financial situation and what steps they can take.”
Given the competition Nutmeg’s offering will inevitably face from other robo-advisers, platforms and technology providers, Money Marketing asked its readers how successful they believe the venture will be.
Sixty-five per cent of respondents to our poll believe the offering will not be profitable against only 23 per cent who say it will be, leaving 12 per cent who are undecided.