How do we help more people to enjoy the benefits of sound financial advice? As the debate around the scalability of advice continues, Mark Polson, Principal at the lang cat, suggests that deep pockets are needed as he considers what will make this business model work profitably in future.
Readers of this fine publication will be all too familiar with the economics of providing financial advice. People, offices, PI insurance, regulatory capital – it all mounts up and sometimes it can be hard to see where substantial profits will come from. And of course without substantial profits there is less chance of a substantial exit for the practice owners.
Small wonder, then, that a number of adviser firms have been gazing covetously over at the fintech space, and at robo-advice in particular. This promises a low-cost, easy-to-run model, which can make advice economic for those who may have been priced out with the removal of commission (though I’ve never been convinced by that argument, but that’s for another day). It’s sort of all gravy, especially if you can find a provider who’ll just let you use their system.
The big question, though, is just how economic robo-advice is. It’s hard to tell – most fintech businesses are pretty reticent about publishing results, which isn’t a surprise. Nearly all tech companies have what we call a ‘deep J’ curve – that is to say they spend freely in the early years when building, and then recoup over the years. That recouping is what leads to some of the yeasty valuations we hear bandied around for a number of businesses, including in the fintech space.
Spicing things up
Happily, though, we have one business which has been around a while and which does publish its results. Not all of them, but enough for us to start inferring some things about how online advice propositions work. That business is Nutmeg, and is probably the bellwether of online investment/robo-advice in the UK at the moment.
We like Nutmeg at the lang cat, although its pricing is a bit toppy at the bottom end. It’s been around since 2011, its proposition looks gorgeous, it has a nice pension wrapper through Embark, and is generally solid on all fronts. Its adverts are everywhere and it’s the logo you always see on any Powerpoint slides about fintech.
So it should be working well, right? Let’s find out. Here’s how it looks:
|FY 2015 PROFIT (LOSS)||(8.9m)|
|PROFIT & LOSS ACCOUNT||(£20m)|
|CUSTOMER NUMBERS||Not disclosed|
Wow. Let’s think about that for a moment. Nutmeg’s running costs are nearly £11m a year, its revenue in 2015 was £1.7m and it has £9m in the bank.
Nutmeg has exactly enough money if it keeps revenue the same to last all of 2016 without requiring reinvestment. If it trebles revenue (which it might well) and keeps the cost base steady then it can last sometime into 2017 before running out of money.
So either Nutmeg stops doing what it’s doing in a little while, or it raises more money.
Building a business
The key issue behind all this is this – how do you acquire customers? Most advisers do this through referrals, word of mouth or professional connections. All of those are free or close to free. When you get a client, you already know that that client will be remunerative and profitable – otherwise you wouldn’t take them on.
When you’re running an online investment service, you don’t have that luxury. You have to fill up your bucket with people you don’t know, and who don’t know each other. And each one of those – in robo-advice at least – doesn’t have much to offer in the way of fees, or they’d be a standard adviser client.
So you have to go out and get these people, and that normally involves spending money. Nutmeg doesn’t disclose its marketing spend, but we reckon it’s in the region of £4m a year. All those Tube ads and big billboards in Victoria station don’t come cheap.
The economics of providing robo-advice are compelling. The economics of finding clients are terrifying. Any firm whose strategy in this space is about marketing its way to success is going to find life hard, and had better have access to capital.
The key to making it work is having a customer base already. That’s what you’ll see fire up the numbers when the big brands come in. Watch the banks, watch the asset managers, watch the insurers.
The question for you, if you’re thinking about providing this kind of proposition, is not if you can build something great. It’s whether you can find clients at an economic rate. The signs – if we use Nutmeg as our model – are that it’s going to be tough.
Mark Polson – Biography
Mark is founder and principal of the lang cat, a specialist platforms, pensions and investment consultancy. The lang cat works with platforms, life companies, fund managers and large advisory firms helping them develop new propositions, turn marketing strategy into action and articulate their services in such a way that people without a financial services degree have a hope of understanding them. Bit by bit it aims to make the industry just a little less corporate and a little more human.
Mark is a prolific writer, contributor to the trade press and public speaker, even when people ask him not to be. He doesn’t play guitar as much as he’d like and spends more time than is reasonable going to gigs aimed at people considerably younger and more tattooed than him.
Follow Mark on Twitter -@theactualpolson