Robo-Advisers

The FCA has a mandate to see how well competition is working in the markets that it regulates. They define competition as: “… innovative firms bringing ideas to market, successful firms thriving, and unsuccessful ones making an exit”. And they suggest that: “When markets are competitive, consumers will be offered variety and choice, with firms striving to win custom on the basis of service, quality, price and innovation. In such circumstances, consumers can feel confident in exercising choice and competition is strengthened”. I don’t have a problem with this definition. But I do have a question. Is it appropriate for every market?

For example: I had a couple of relatively routine eye operations a while ago on the recommendation of the consultant that I see once a year. I asked him how much they would cost and he quoted me a figure which included a room for the day in Moorfields hospital, his surgery and the team that would work alongside him. It seemed reasonable.

I suppose I could have contacted some other consultants to see if I could get a cheaper quote but I knew him, trusted him and, in any event, cut-price eye surgery did not appeal to me. As far as the service and quality was concerned I had nothing with which I could compare my treatment but it seemed fine. As for innovation: He may have been using new techniques. But how could I know?

So, in terms of doctors, dentist vets and others I don’t think the normal rules apply. And if you look at other professions, such as lawyers, accountants and financial advisers dealing with individuals I think the same is true. Someone or something leads to a conversation, a meeting takes place, requirements and solutions are discussed and two parties decide whether they want to work together. Indicative costs and timelines are then identified and, if all is well, next steps are discussed. I doubt many clients then go shopping around for a competitor that could be cheaper

In fact, as far as financial advisers are concerned I don’t think I have ever seen a survey where competition was marked as a serious threat to success. But now we have online players. Will they be competitors? Yes indeed. But it seems to me that most will be competing with one another rather than with “traditional” financial advisers. Then the normal rules will apply.

Once there was one. Now there are many. For example, current online propositions include:  Netwealth, Nutmeg, Cavendish, Lloyds, Barclays, Money, Wealthify, MoneyFarm, Halifax, Santander, HSBC, Fidelity, NatWest, Strawberry, AJ Bell, Alliance Trust, Hargreaves Landsdown, Interactive Investor, Bestinvest, Chelsea, TD Direct, JP Morgan. And there are many more in the pipeline.

Banks are quite well positioned in the space given their existing customer base. But their propositions may not be as attractive to the millennials as some of the start-ups. However, the millennial segment is not very attractive in terms of investable assets; It’s the golden oldie consumers who have the gold. Attracting new investors to new players is challenging and expensive. And although organisations are becoming more adept in search engine optimisation I guess that the more players in the online investment space that are bidding for key words on search engines then the higher the cost will become. That’s not the only profitability challenge.

Assumptions have to be made about the average investment size and the time the money will stay on the platform. This latter point is key when dealing with younger people. They may need every penny they have and every penny they can borrow and more to fulfil their dream of getting on the housing ladder. By definition, new entrants will have little empirical data to calculate retention.

The cost of engaging new investors varies widely. But data I have seen suggests that for start-ups the average may be £150. And that the average initial investment is around £5000. At 75bps fees that works out as £37.50pa and requires the investment to remain for 4 years to just cover the engagement cost. Some propositions have lower fees; say 50bps and others charge no fees at all of the first, say £10,000. And on top of this a number have a minimum investment of just £1. Fierce price driven competition. With each other, not with financial advisers.

My understanding of firms in the investment advice market is that they have a very low cost of client engagement. Often nil. Let us say a referred client makes an initial investment of £50,000. This could produce revenues of, say £1500 initially and at least £250pa thereafter. It’s a different world to online start-ups. And before you ask about the cost of running an advice business opposed to an online business let me say that you would be surprised at the cost base of the latter and the number of people employed.

None of this is to suggest that there is a limited future for online investment. The model is bound to be successful. But I think there will be as many failures as there are successes in terms of creating value for the shareholders. Which takes me back to the FCA definition of successful competition: “… innovative firms bringing ideas to market, successful firms thriving, and unsuccessful ones making an exit….”

Some online investment firms are adding advice to their propositions. This might be challenging in terms of culture and recruitment. At the same time many investment advisers are leaning towards or now actually offering a non-advised service alongside their traditional model. I think both approaches make good sense for a number of reasons. First and foremost, the sons and daughters of clients may well prefer to have an online relationship and it is never too soon to think about succession. And second, as clients become educated as result of you sharing knowledge and insights they may wish to do some direct business and you might wish that they did it through you.