With Moola poised to become the latest robo-adviser to fall on its sword, the question has been raised over how digital wealth managers can survive and how incumbents can adapt to capitalise on the gap they leave behind.
Moola’s parent company JLT Employee Benefits surprised the industry earlier this month by closing the robo-adviser just 18 months after it acquired the business following a strategic review.
When Portfolio Adviser asked JLT’s parent Mercer to expand on the reasons for closing Moola, it said: “We can confirm that we have taken the decision to close down Moola. All existing investors have been contacted and given options as appropriate to them.”
Moola has been given a lifeline by wealth manager Richmond Wealth, which is waiting for regulatory approval to acquire the business to boost its tech offering, but the decision by JLT to close the robo-adviser is further evidence of a clear trend developing over the past few years.
Latest robo-adviser to fall by the wayside
Moola lasted almost five years in total but just 18 months as part of JLT. Other robo-advisers to fall by the wayside in the past 18 months include UBS Smart Wealth, Investec Click and Invest, and Fountain. UBS’s offering lasted 18 months, Investec’s was operational for about two years while Fountain closed its doors within 18 months of opening.
Nutmeg, which launched in September 2012 and is yet to make a profit, reported operating losses of £18.6m in 2018 with marketing accounting for a third of the total. Click and Invest’s operating losses reached a total of £26m over two years.
Much has been said about the difficulties of these entities remaining financially viable because the average portfolio size tends to be just a few thousand rather than millions. Once other costs such as branding, marketing, distribution, custody and paying staff have been considered, margins are slim if there at all.
Too many robo-advisers flog investment products
But in addition to struggling with high costs, Altus Consulting director Simon Bussy says robo-advisers have failed because they have come to market to sell a product rather than meet a customer need.
“We’ve got all these very similar propositions from digital wealth managers and basically what they’re trying to do is flog an Isa or direct investment account,” he says. “If you look at just the D2C market there are loads of them and what you’ve got is all this replication of what everybody else is doing. For some reason, they think they’re going to get a better response and, quite frankly, they’re not.”
Bussy points to Pension Bee, the pension pot consolidator, as an example of a firm which not only fulfils a customer need but has also carefully considered its target market’s wealth when it comes to its commercial model.
“A few years ago, they had no brand, but they are actually meeting a customer need, ie consolidating multiple pension pots, and they’ve made it really easy. Also, if you can attract clients who have already got some assets under management, ie in different pension pots, that’s a much quicker way to get to scale.”
Marcus demonstrates the power of brand
There is also the fact that many of these robo-advisers have no consumer brand among the target market, the baby boomers, which holds most of the wealth in the UK.
Capco partner and UK head of wealth and asset management Richard Lewis says trust and loyalty are vitally important to this generation when it comes to the relationship with their money manager.
“Most holders of wealth are older and appreciate a relationship with their adviser based on trust,” he says. “As such, they value being able to deal with a human being they can look in the eye.”
Lewis says this will change over the next 20-30 years as wealth is transferred to the next generation, but wealth managers need to embrace digital distribution now because baby boomers are tech savvy. “It’s a myth that only younger generations use smartphones.”
A brand with trust entering the digital market will be successful, says Lewis. To illustrate the power of brand, he notes Goldman Sachs’ Marcus, an online bank launched in the UK in September 2018, that offers a savings account with no hidden fees or charges.
Marcus attracted 50,000 customers in its first two weeks of operation and at the end of last year announced it was actively slowing down growth as it rapidly approaches the $25bn threshold at which point it must ringfence its retail and riskier banking operations.
Bundling digital with other wealth management services
Lewis says in general traditional wealth managers are embracing digital and have “reasonably well advanced” propositions but it takes more than a good digital platform to engage the next generation, who it is difficult to make money from. The key is to make advice economical and offer a “more composite sets of services” by bundling it with other elements such as fees, advice and payments.
He thinks despite its woes, Nutmeg’s decision to offer advice is a sensible move for added income. Nutmeg offers clients the ability to build a plan with a financial coach for £275 or comprehensive personal financial advice for £575, but industry figures have questioned whether the fees are too low to be profitable.
Another way to adapt is to target entrepreneurial wealth which can incorporate the younger generation. LGT Vestra has a significant chunk of clients who are entrepreneurs and has invested time in programmes to encourage and aid the move from business owner to investor.
Behavioural design can improve customer experience
Bussy says banks should be well placed to move into digital wealth management considering they already have the customers, the brand and the distribution, but they haven’t been getting the amount of traction that they would like.
“Part of that is because some of those propositions are pretty dull and they plan very much from a traditional financial services mindset,” he adds.
Using design to influence human behaviour, known as behavioural design, to rework the customer experience is one way banks can move with the times, says Bussy. Banks have access to a lot of data and have a cash and investment proposition and “it’s about trying to join those things together in an integrated fashion using the right terminology”.
“As an example, the word ‘risk’ for many consumers is a scary word,” he says. “So, how can you choose different terminology to still meet FCA regulation and requirements but also engage customers and nudge them through their journey?”
Coutts undertakes modernisation journey
Coutts is undergoing a shift in its marketing approach. Not only is it aiming to convert its long-standing banking customers to investing customers, but it is also targeting retail customers through its online Coutts Invest service.
Coutts Invest launched in April 2017 and seeks to tap into existing Coutts, Natwest and RBS clients. The range comprises five risk-based portfolios available to customers with as little as £500 to invest via a general investment account, Sipp or Isa.
Senior multi-asset portfolio manager Jeremy Ward recently told Portfolio Adviser the product has attracted £450m since launch and the firm is planning a marketing push this year. “This is a good product and we want people to invest their savings that are just sitting in an account and not getting anything on cash,” Ward said.
Ward added having Alison Rose, former head of RBS commercial and private banking, of which Coutts is a part, moving into the CEO role at the bank proper will help this push from a brand stand point.
