The Fintech Folly – Why Are Supposedly Smart Financiers Flushing Their Money Down the Fintech Toilet?

Date Published: 31 May 2016

Category: Robo-advice

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I started my fund management career back in 1986 and have seen my fair share of insane business models over the years.

Over those 30 years I have analysed countless business plans and company report and accounts.   Very few have possessed the lack of fundamental financial sense or business reality of the various UK Fintech robo-advice models; being announced on almost a daily basis.  What I have witnessed is a ‘get rich quick’ bandwagon where wishful thinking and hype wins over logic, fundamentals and business acumen.

To find out the facts rather than the fanciful, we are conducting a research paper into UK robo-advice business models which will be completed in the very near future. In the meantime, some food for thought….

The Fintech Folly

In the case of Robo-advice, a mis-leading label if ever there was one, seemingly smart business people / investors are jumping on the bandwagon and follow the herd without asking about the route or treachery of the journey.

The chart below shows how often the words ‘robo-advice’ are entered into Google searches, relative to the total search-volume across the world from 2005 — 2016:

Robo-advice adwords

Source: Google Trends

Before analysing the UK industry, a review of the more mature US robo-advice market proves insightful.    US robo-advice companies have the advantage of being allowed to give financial advice without the significant regulatory costs that apply to UK companies, and the US payments system is far more efficient than the UK.  Yet even the exceptionally well-managed poster child of the US industry, Betterment, managing over $4bn, still makes no profit.  More worryingly, it has been reported that the growth rate for the largest robo advisers has fallen to about a third of a year ago.

So what of the UK?  I believe that in the UK robot advisers will either go bust, be bought for pennies by incumbents, or succeed but struggle to gain meaningful market share for the following reasons:

  • – Low entry levels – the cost of acquiring smaller customers is extremely high — SCM Direct estimates that the average cost of Google AdWords or other online mediums is about £2.70. If you assume 1.5% become customers, then the acquisition cost is £2.70/0.015 = £180 for this one channel alone.  Our assumption is similar to a recent report on robo- advisers which estimates that the cost of acquiring a client in the UK is around £200.


  • – The typical management fees in £’s are low – The fee ex VAT is unlikely to be more than 0.625% pa (i.e. 0.75% pa incl. VAT). In the US, a typical average customer acquired by the US largest robot adviser, Betterment, is $20,000 i.e. £12,000. Even if you assume the figure in the UK is higher, at £25,000 x 0.625% = £156 pa management fees per client.


  • – Robo-adviser staff costs are high vs their revenue — we estimate that the employee costs alone at one of the UK’s largest robo-adviser companies was £817 per account pa recently (we divided their latest reported staff costs by estimated number of accounts, itself derived from their latest reported turnover, recent reported average fee and average account size). Please note: in this example staff costs represented less than half their overall costs so even with significant growth, the total cost per account is likely to remain high.


  • Loyalty tends to be low – A 2009 US study found that the average holding period for a fund was 3.2 years.  Many UK clients have been attracted to new robo-adviser firms via special offers e.g. free management for a certain time period or up to a certain sized account.  Such offers tend to attract younger or less sophisticated investors, and the investment often represents a high proportion of their free assets.  Investors with this profile tend to have experienced fewer investment cycles and therefore are more prone to panic when markets fall or they read alarming headlines.  3.2 years may sound low but if you are giving free management up to a certain size or for the first 12 months, your effective average client life might be even less than 3 years.


Within this example robo-advice business model, each client would cost £180 in up front advertising costs and £817 per annum in just staff costs, i.e. a total cost of £2,794 over the client life (even excluding all the non-staff related costs) whilst earning total fees of just £499. 

Interestingly, a UK robo-adviser firm following its recent launch stated: ‘I wouldn’t expect to be reaching breakeven before we have £2 billion AUM,’… ‘We’re talking about several years, maybe five or six.’ 

  • – Regulatory risks – In the UK the regulator has seemingly turned a complete blind eye to the misleading statements, misleading performance, misleading fees, not to mention lack of appropriate regulatory permissions of many UK robo-advisers.

As a result of their desire to fill the advice gap they appear to be plugging one hole whilst creating an even larger regulatory one.  Many of these companies appear to be storing up huge liabilities if down the road either their algorithm fails or markets collapse, leading to customers complaining to the financial ombudsmen of bad advice (whether or not these companies believe they have given advice), or the FCA simply wakes up to the sector’s systematic failings.

In the US, the Massachusetts regulator has recently warned that robo-advisors may not be able to deliver “appropriate” investment advice as there is no checking whether the information given by clients via electronic questionnaires is accurate.  The Secretary of State for Massachusetts, said; “Entities that create computer-generated portfolios but fail to do the necessary due diligence to know their customers and who specifically decline most if not all the fiduciary duty are not performing the duties of investment advisers

The Fintech saloon bar

I can understand those making money from robot advice conferences or expensive research paper servicing a group of idiotic companies and financiers wanting to get into this space that will no doubt pay ridiculous amounts to attend or purchase expensive research.  I’m sure these will undoubtedly soon be followed by the obligatory Robo-Advice or Fin-tech Awards events with expensive tables.   But as a business proposition this makes much more sense than funding the next lunatic robot adviser company.

Those who wish to learn from history may wish to study the dot-com speculative bubble which covered roughly 1997—2000 as there are many similarities.

Full report to follow shortly.

Alan Miller



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Alan smith
2 years ago

Interesting article – there’s no doubt that huge amounts of VC money will be burned in an ultimately fruitless quest for success. However there will undoubtedly be some winners as there was in the dot com boom.

Let’s face it, Hargreaves Lansdowne were effectively an early prototype robo,adviser and have tens of.billions AUM and a FTSE 100 listing to show for their efforts.

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