Advice rewired: Do robo-advisers dream of actual profits?

Philip K. Dick's poignant 1968 sci-fi classic Do Androids Dream of Electric Sheep? was famously the inspiration for the Blade Runner films. If he was writing today, however, might Dick instead be wondering if robo-advisers dream of ever turning a profit?

A substantial rummage through the accounts of those inhabiting the UK robo-adviser space has revealed it is clearly a market still very much in its infancy - although that excuse may wear thin for investors and backers before long.

While turnover and profit/loss figures are not available for all of the market's robo firms, the accounts that are available paint a grey landscape. Not one of the firms I looked at posted a profit in their latest available financial accounts.

In fact, since the dawn of the robo-advisers, they have collectively lost more than £114m. An astonishing sum in itself, it does not include the money spent by UBS on its proposition, nor the money spent by Standard Life Aberdeen's advice arm 1825 or NatWest, or indeed some of the smaller, organic firms that do not post profit/loss accounts at Companies House.

Investec's fallen venture aside, two of the nine firms that had publicly available accounts posted losses of more than £10m in their latest financial year. Nutmeg was £12.15m in the red in 2017 and Moneyfarm lost £13.93m over the same period. These are big losses for companies that are by no means giants - they had respective annual revenues of £4.56m and £1.01m.

By no means giants - but by no means new players either. Nutmeg, which is considered the pioneer in the UK market, was established in 2011 and has been relentlessly trying to acquire scale ever since.

Indeed, in this pursuit of scale, which has seen multiple advertising campaigns appearing on TV and posted all over London's underground network, Nutmeg has lost £41.8m since inception. By comparison, Moneyfarm has lost £21.4m since 2014.

Such losses have been made possible by big financial backers with deep pockets. Just this January, Nutmeg secured £45m in a funding round led by Goldman Sachs before stating its intention to raise more money through a crowdfunding platform. In total it has raised some £116m over the course of its lifetime. People with deep pockets clearly think this robo-advice gig will eventually take off and are willing to bet big to back some horses in the process.

At the more fresh-faced end of the market, Moola, the firm founded by TV money personality Gemma Godfrey, made just £889 - yes, you read that right - in revenues in its 2017/18 financial year before being sold to employee benefits firm JLT for an undisclosed amount. It made a loss of £1.3m in the same period. Another firm with an exceedingly low turnover was Exo Investing, which pulled in just £3,170 while reporting itself as £868,000 in the red.

Moola Systems Limited was incorporated in April 2015 - more than four years ago - while Exo Investing Limited officially launched a year later in March 2016. In their short lifetimes, the companies have so far lost £2.13m and £1.37m respectively, according to  their latest accounts.

They are relatively green firms, yes, but customers do not seem to be easy to come by in an already congested market - and any robo-adviser would surely attest to that. And a congested market it is too - while the accounts of nine firms were sifted through for this article there are a further five or six robo-advisers that have not made their profit and loss accounts public, and that does not include the ventures led by banks either.

Out of those nine firms, however, their latest annual reports showed they made a collective loss of £37.3m while generating a meagre £12.8m in revenues.

Note: EQ Investors is also part of a Chartered financial planning company. Source: Company accounts

‘Spend money for scale'

Addressing the lack of profitability in the market, OpenMoney Adviser Services CEO Anthony Morrow, whose firm is included in the data in this piece, says money will inevitably be lost when new players try to disrupt a well-established market.

"Expected losses might not look great but they're a lot better than unexpected losses and, from our point of view, we still think we'll break even in 2021," Morrow says. "That'll be a five-year plan to break even, we know how much we'll spend to get there and we're pretty confident we'll do that."

While OpenMoney has been classed in this article alongside other so-called robo-advice services, Morrow's firm's proposition is quite different to the others in the market. It offers not only financial investment advice but also debt advice among other services.

OpenMoney turns away around two-thirds of clients from investing with the firm, Morrow says, because it would not be suitable to let them. As a result, it has to find other ways to service clients and save them money outside the world of investing. The differentiation between his firm and what he calls online discretionary fund managers [DFM] is, he believes, key to future success and profitability.

What Morrow means by online DFMs is effectively services that offer ready-made portfolios customers can match up to their risk appetites. They are generally excellent at explaining the basics of investing and engaging first-time investors, but they are not offering regulated financial advice or the proper hand-holding many believe is necessary to plug the so-called ‘advice gap'.

"We took a decision to diversify what we're doing here because, if we're just chasing assets, it's going to be a long time before we reach profitability," he adds. "If your sole thing is to try and take Hargreaves Lansdown's market share with a straightforward, easily replicable product - in other words, an online DFM - then you are going to have to spend money to get that scale, if you ever get that scale."

The 'Hargreaves Lansdown problem' cannot be underestimated by those online discretionary services. They will always be lumped in with and compared to the D2C giant that has all but cornered, captured and conquered the online direct investment market.

It has exceptional scale, with more than £90bn of assets under administration, compared with just over £1.5bn for Nutmeg, the largest UK robo-adviser. In fact, Hargreaves Lansdown on its own dwarfs the relatively young robo-adviser market and, if you were to compare robo-advisers' scale to that of the other D2C platforms, adviser platforms and asset management giants like Vanguard, which has its own online investing platform, it only grows smaller and smaller in comparison.

'It doesn't add up'

For Boring Money CEO Holly Mackay, the robo-advice market in its current form is not going to create the scale it needs to be profitable and sustainable.

"I think it [profitability] will happen," says Mackay, "but I'm saying we may literally be looking at two incumbents - there's room for one or two. But to do that, they'll have to evolve as well."

One of the stumbling blocks to mass scale is the cost of acquiring clients for robo-advisers, Mackay adds. Research from her firm has found it takes around £250 to add a robo client and the average balance invested in a robo proposition at the end of the first quarter of 2019 was a meagre £10,800. It does not take much to realise 0.40% to 0.90% of £10,800 does not make for much annual revenue, let alone profit.

"It doesn't add up - or it only stacks up as a very long-term play," Mackay continues. "And not everyone will be able to afford to keep burning through the cash required to get there.

"I expect the couple that do survive will have to evolve - and they will have to tackle the fact that what they have today is not appealing, or it's not enough to convince cash savers to make the leap. And, from a sort of product or proposition point of view, no-one's really answered that question yet."

Indeed, Mackay says the current online discretionary managers are not plugging the gap in the market they intended to - a point Morrow agrees with.

The OpenMoney boss is in no doubt a market is out there and that Hargreaves Lansdown can be attacked - however, he stipulates the D2C giant will not be touched by the product "that's currently being produced by everyone else". 

"The [other robo-advice] products out there are non-advised - here's an ISA, here's a GIA and here's some portfolio of ETFs coming in at just shy of 100 basis points or whatever," he adds. "That clearly isn't working so they need to evolve and if they don't I can easily see them all failing because it's just not going to be there."

Not actually robots

The problem for so-called robo-advisers might well just be in the perception of what they are and, sadly for them, not in their nature. Despite most people referring to them as robo-advisers, none of them are really advice-based services and, if they do offer advice, they do not do so through robots but through humans instead.

Indeed, some of them may have gone some way to proving Morrow's point by launching more substantial advice services alongside their online discretionary offerings.

Nutmeg and Scalable Capital, for example, both offer advised services but do not do so through their original, central propositions. Those central propositions are, as Morrow says, essentially online discretionary management portals and customers can choose to pay for advice as additional services.

"People still want a trusted human being to look them in the eye and say what you're proposing is fine, you're not being a wally, that's the course of action to take," adds Mackay. "It's just that final validation that I think people are looking for that's missing with a robo-adviser."

And, going back to basics, says Mackay, robo-advisers are not solving the problem they were created to: to bridge the advice gap. In other words, they are not helping those who need assistance with investing and their finances but cannot afford to pay for a traditional flesh-and-blood financial adviser.

"In the data we see, they [robo-advisers] have actually not done a very good job of converting cash savers to investors," she continues. "They've actually taken customers who might otherwise have gone to more traditional wealth management services and paid an adviser fee. I think that means, at the core, they're not fixing the mass-market problem."

Still, to add a positive spin to the debate, Mackay does say that some of the hardest graft has been done by robo-advisers by acquiring early adopters of their services. As a result, she explains, average account sizes should start to grow and scale may be achieved a little more easily than before.

"They've certainly seen people putting toes in the water and testing them with smaller amounts," she points out. "So I think growth for them will start to come, the reliance on new customers will diminish, and the reliance on getting existing customers to invest more with them will kick in."

Mackay also recognises the importance of adding pension accounts to robo-advice propositions - something Nutmeg has managed to do recently.

"That was the key for the DIY platforms - pension accounts are bigger accounts," she explains. "So, to my mind, when I look at any robo adviser, there are two things they probably need to focus on.

"What are they going to do to tackle that desire for human beings to sit in between the processes? And what can they do to persuade people to trust them with their pension money? Whoever can crack those will be the ones to stick around."

To that end, Nutmeg responded to Invest & Click's demise with a consolatory but positive tone. And, as though it instinctively knew what experts of Mackay's ilk would say, stressed the importance of the human element in its proposition.

"The sector is evolving quickly, but not all digital wealth managers are the same," says Nutmeg CEO Martin Stead. "Nutmeg has a purpose-built, technology-first business, which uses proprietary in-house trading and investment management systems to give customers a full service delivered by our 180-strong London-based team. Our business model works at scale and continues to grow rapidly.

"There's great opportunities for innovative UK fintechs in a strong, direct-to-consumer domestic market as well as growth opportunities overseas. We very much see the future of wealth management in the UK as digital, combining the best of man and machine."

‘Never say never'

So, will this robo-advice market one day turn profitable? Well, Morrow certainly had his say about one share of the so-called robo-advice market. For absolute clarity, though, he concludes: "It looks difficult, doesn't it? I'm not going to say it's never going to work because that's only going to blow up in my face, but it looks as challenging as it did a few years ago."

And, for Mackay, robo-advisers have to adapt and move with the times. She believes the accounts they are posting at the moment are unsustainable: "They can't just sit still and go, ‘we've launched some online discretionary proposition, aren't we wonderful?' They're going to have to tackle the advice gap audience and that means clever ways to use tech to put human beings in touch with other human beings."

Clearly the robo-advisers have more work to do and some way to travel as they strive to turn their electric dreams into something more tangible. To remind them of their target, it seems appropriate to end on something Philip K. Dick once wrote: "Reality is that which, when you stop believing in it, doesn't go away."

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• Topics
• Technology
• robo-advisers
• OpenMoney
• Boring Money
• Holly Mackay
• Nutmeg
• Scalable Capital
• MoneyFarm
• Moola