Fintech Financial Fantasy

Date Published: 2 October 2017

Category: Investment, Robo-advice

Fintech Financial Fantasy

Last year we wrote a report on the folly of the UK Robo Adviser fintechs [1] showing how ‘UK Robo Advisers are ‘wired’ to lose money, and most will go bust before acquiring the sizeable assets under management to ensure their sustainability.’

Unfortunately, the UK Treasury seems to either have not read the report, or not understood it, judging from a speech I heard last week at a conference [2] by Stephen Barclay, Economic Secretary to the Treasury.

In his 15-minute speech he spouted platitudes of how important asset management was to the UK economy, focusing on our leading UK fintech industry. He then told the audience how closely he was working with the UK investment industry.  However, these conversations must be one way, as I have never witnessed a speaker run off stage quite so quickly, presumably to avoid any questions being asked by the room full of representatives from the UK asset management industry.  Judging from the speed of acceleration off the stage, Mr Barclay could well be the UK’s answer to Usain Bolt.

Meanwhile, Nutmeg has just reported losses of £9.3m for 2016, up from £8.9m in 2015.

One might expect in an innovative company for the losses to reduce as the business accelerates from start up into a profitable business.

Here is the financial history of Nutmeg:

Turnover Operating expenses Operating loss
31st December 2016 £2,556,406 £11,937,856 £9,381,450
31st December 2015 £1,718,598 £10,792,704 £9,074,106
31st December 2014 £635,381 £5,988,396 £5,353,015
31st December 2013 £103,903 £3,810,025 £3,706,122
31st December 2012 £2,591 £1,782,364 £1,779,773

Even though the company had cash at the end of 31st December 2016 of £27.9m, it still says in the accounts that ‘the company may require further cash injections to continue to develop and market its product offering and to build its customer base and its assets under management’.  This means that despite Nutmeg raising £42m in 2016 and £71m to date [3], it may need more money!

Forget office costs, advertising costs, custody costs or any other costs, its employment costs alone of £5.3m are more than twice its turnover.

One of the central issues with the UK fintech models I have seen is there reliance on smaller accounts – Nutmeg managed £600m for 25,000 clients i.e. an average balance of £24,000 as at the end of December 2016.

To put it into context, Nutmeg charges between £108 and £180 pa for a £24,000 account (depending on whether a customer opts for the fully managed or fixed allocation portfolio).  Based on its recently reported costs and number of accounts managed, salary costs alone work out at £214 per account, and overall accounts at £478 per account.

Despite this, Nutmeg recently announced that it has 80% market share and everyone at Nutmeg is committed to continuing to lead the way in the digital wealth manager market.’ [4]

If Nutmeg has 80% market share, what is the market? As digital wealth mangers ourselves with an average client account size of around £350,000, we are most interested in this answer.

Answers on a postcard please to:

Stephen Barclay, Economic Secretary to the Treasury, Unit 1, Horse Guards Rd, Westminster, London SW1A 2HQ

Meanwhile, to be fair, Nutmeg is not alone.  Moneyfarm recently reported losses of £6.4m on turnover of just £168k in the year ended 31st December 2016, with expenditure on marketing an astonishing £2m and salary costs amounting to £1.9m.  But these numbers do not seem to worry its co-founder and Chairman who states that ‘Based on our current plans, we’ll be turning a profit within two years’. [5]

Another firm, Netwealth recently raised £10m in a second financing round in which it was reported that [6]The additional fundraising is expected to carry Netwealth through the next three years, with Ransom saying the company is on track to be cash flow positive in 2021, which would require £1.8 billion of assets under management.’

Surely the FCA and the Treasury should be looking at UK robo adviser models to test whether or not their financial models make any sense.  If the answer to such analysis is no, is it not irresponsible to allow mainly novice investors to have their money managed for the medium to long term, by companies who may well not exist in the years to come?

 

Please Note: Past performance should not be seen as a guide to future returns. The value of investments and the income from them can go down as well as up and investors may not recover the amount of their original investment.

SCM Direct is a trading name of SCM Private LLP which is authorised and regulated by the Financial Conduct Authority to conduct investment business.

[1] https://scmdirect.com/wp-content/uploads/2017/02/Fintech-Folly-Report-06-July-2016.pdf

[2] https://live.ft.com/Events/2017/FT-Investment-Management-Summit-Europe-2017?mhq5j=e7

[3] https://techcrunch.com/2016/12/23/uks-nutmeg-pulls-in-an-extra-12m-for-its-series-d-from-taipeis-fubon-bank/

[4] http://citywire.co.uk/wealth-manager/news/nutmeg-loss-widens-to-9-3m-as-it-plans-major-uk-push/

[5] https://www.ft.com/content/55ceb160-62c1-3cf2-a9e0-5b28ff2b7a2f?mhq5j=e7

[6] http://citywire.co.uk/wealth-manager/news/high-profile-investors-inject-10m-into-netwealth/a1049243

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Aviva and Wealthify make a bold fashion statement - the lang cat
9 months ago

[…] The hatchet jobs on these numbers have quickly sprung up, and whilst these articles do need to be read with some context of who the authors are and their own business models, there are an awful lot of awful truths being exposed. The start-up robo market is becoming increasingly saturated, and whilst funding is still reasonably accessible, the clients are not. Actual acquired customers (not folk who have given you their email address) are rarer than a pullet’s gnashers, and when they do invest the case sizes are small. Nutmeg’s results report £600m of AUA held by 25,000 clients,… Read more »

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