Robo-advisers might be dying – long live digital wealth managers

Feb 19, 2020 3:37:46 PM

Whilst many in the industry are not enamoured with the term rob-adviser, preferring digital wealth manager, we are approaching the tenth anniversary of the first robo-adviser / digital wealth manager launched in the UK aimed at disrupting the traditional wealth management sector. At the height of the market around 2017, there were at least 17 digital wealth managers, mostly fintech start-ups, competing to do the same - a market currently worth around £1trillion of client assets.

In the past 12-18 months though, as operating costs have spiralled within these online businesses, exposing the weaknesses of their business and financial strategies, we have witnessed the demise of several of these new market entrants, most notably Investec Click & Invest, UBS SmartWealth, Tiller Investments and Moola.

In their quest to attract a client segment seen to be too small in individual assets by the traditional wealth managers, the focus has been to incorporate technology to boost efficiency enabling digital wealth managers to lower investment entry thresholds, actively manage pure ETF portfolios, and offer fairer fees. However, client acquisition costs, operational costs and compliance costs have been vastly underestimated resulting in the majority of digital wealth managers continuing to experience hefty year-on-year annual losses and eye-watering levels of fundraising.

Nutmeg, considered to be the largest in terms of assets under management, recently declared a loss of £18.6m for 2018, following year-on-year losses since launching in 2011, against a fundraising total of £116m since launch. Other robo-advisers have also announced substantial losses in their latest accounts – Moneyfarm’s UK operations reported operating losses of £9.8m on turnover of £0.3m, Wealthsimple UK lost £3.6m on turnover of £44k and Netwealth reported operating losses of £5.0m on turnover of £438k.

Clearly it requires capital investment to advertise on TV, across social media, in buses and tube stations, especially as the target audiences have been naïve, with new millennials often struggling with their monthly finances. The rush by market entrants to invest in digital technology has not always delivered the intended outcomes, and there are echoes of the tech boom of the 1990s where roughly a third of entrants were successful, a third went bust and a third were swallowed up by incumbents. Digital wealth managers that are not just surviving, but thriving, possess proven investment strategies producing consistent outperformance, flat operational structures, lean staffing levels, ability to scale without significantly increasing operating overheads, and without the complexities often associated with digitising in-house legacy infrastructure.

The enduring success of one such digital wealth manager, SCM Direct, is testament to the fact that digital wealth managers can succeed.

SCM Direct is run by professional experienced senior managers with a strong ethical approach who possess not just investment acumen, but business acumen and commitment to patience with a long-term strategy. Their organic growth strategy has not just been assured but is continually improving, for example through the delivery of several new capabilities:

(i) the use of floating-weight managed portfolios (drift) to ensure clients are always aligned in terms of their asset allocation;
(ii) providing clients with online access to a low-cost SIPP wrapper;
(iii) enabling clients to invest cash in one of several currencies (Sterling, US Dollars or Euros), and;
(iv) the cautious launch of new products: at launch there were three core portfolios, in 2014 three blended 50/50 portfolios, and in 2019 a new 100% equity portfolio and an ethical ESG portfolio.

These transformative capabilities were enabled through a change in technology provision. At the end of 2017, SCM replaced its in-house platform and switched to the 'white-labelled' investment platform operated by Hubwise Securities, the FCA-regulated technology business with a clear and dedicated focus on the retail wealth market.

The multi-wrapper ‘white-labelled’ investment platform from Hubwise has allied modern technology, owned and controlled by Hubwise, with multi-asset execution, investment administration and full responsibility for client money and nominee custody, to deliver scalability and high levels of process automation for growth-oriented investment firms.

The partnership with Hubwise's digital technology and custody platform has enabled SCM Direct to benefit from investment product innovation, operational efficiency and fulfil their commitment to afford clients 100% transparency on fees and performance. This ensures the SCM Direct investment team can focus on investment management and client service through their actively managed ETF portfolios and outperformance track record.

Utilising the Hubwise platform resulted in over 30% year-on-year asset growth last year for SCM Direct but within a tightly controlled operating cost framework. With Hubwise owning its modern platform technology, SCM Direct has been able to benefit from a number of other smart features, including:

  • an automated fractional ETF trading algorithm to maximise client's investment values
  • access to, and electronic execution in, UK and international listed securities and UK and European collective funds
  • the construction of mixed currency model portfolios with automated FX
  • an intuitive client onboarding journey with real-time AML/ID checking
  • the provision of an expansive REST API should SCM Direct want to control the client engagement and user experience layer
The 'whole-of-market' investment platform from Hubwise is the proven alternative strategy for any DFM with the ambition to deliver a digital, self-directed investment proposition, within a predictable cost model and without impacting existing infrastructure.

So whilst many Robo-advisers appear to be dying – the digital wealth manger SCM Direct is thriving.

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