Robo Wars
It’s a tough job putting our annual guides together. For both our recently published Guide to Direct Platform Investing and our imminent(ish) guide to advised platforms, a lot of work goes into research, preparation and writing (no, really…). We then go through the editing/proofing/setting process, and eventually, if we don’t kill each other, the final version is released to the world. Without fail there will at that point be some sort of market event, product launch, repricing or some other change that is too late to include. And with our latest direct investing guide we have actually been treated to two.
Firstly, within a matter of hours of the files being sent to the printer, UBS closed its SmartWealth service to new business, proving yet again that nominative determinism doesn’t work in financial services. And that was quickly followed up by the news that a collection of robos (1) are planning on lobbying HM Treasury, the FCA and anyone else who might listen to relax the suitability rules for digital investing.
These two stories are not unconnected. UBS, like many others, found the direct investing market formidably difficult to break into. The market is utterly dominated by Hargreaves Lansdown, it has a market share of around 40% and is currently picking up new clients at a run rate of around 11,000 a month. There’s also a 95% client retention rate – they just don’t leave, no matter how shiny/cheap/cool the alternative is.
The UBS service was hilariously overpriced and only had a handful of customers, so no one will really miss it. However, it does serve to highlight just how hard it is to launch a D2C/robo business. Even big, deep-pocketed brands such as UBS are finding it impossible to make a dent into HL’s figures, and for the smaller start-ups the numbers are increasingly alarming.
Last month one of the start-up robos posted its latest accounts to Companies House. It doesn’t matter which one it was, because it could be one of many with a similar story. This firm is posting UK revenue well below £500k, with a cost base around £15m. Over £5m was spent on marketing during the period in question, and the overall loss was around £14m. It is, of course, perfectly normal for start-up businesses to experience losses in their early years, but the level of losses that the smaller robos are posting is insane and unsustainable.
Against this backdrop of tiny inflows, it comes as no surprise to read that a collection of robos (1) are seeking to get a reduction in the level of regulatory requirements for suitability. As a reminder, most of these services are Discretionary, so even if you are not offering advice (and some are) you still have a regulatory requirement to ensure suitability. This means that as well as the usual risk tolerance questions, you need to assess affordability.
If you are struggling to attract flows, the last thing you want to hear is that you have to turn away around 60% of potential customers because they fail the affordability checks, but that is exactly what is happening. And with household debt at record levels, that’s exactly what needs to happen. Anyone in this situation should be paying off their debt and saving before they even think about investing via a robo, and if anything the regulation should be more stringent in this respect.
This lobbying is a desperate commercial measure. When the only way you make money is by selling products, you clearly want to make it easy for folk to buy your stuff, but suitability must come first. These services are supposed to herald a new era for financial services, ‘democratising investing’, however by putting sales ahead of suitability it is clear where their priorities lie. It’s an old-skool product push, dressed up with a shiny app.
This collection of robos (1) would be better served by spending time and collective energy to show the benefits of investing, the value of advice and giving folk tools/services to gain control of their financial life. Debt management needs to be part of this, as is enabling a more holistic view of your finances beyond a bunch of ETFs. This isn’t beyond the wit of man, especially if the industry can create a consistent voice, however this would require a shift in mindset for most involved. If these firms are to avoid the fate of UBS they need to become genuinely customer centric, ensuring customers get the best possible outcome. Their current product-centric nature looks increasingly like their fatal weakness.
(1) insert your own collective noun joke here
IT’S COME AND HAVE A GO: THE (LATE) SUMMER SPECIAL
Ah, summer holidays, what memories. School’s out, Alice Cooper’s screaming, the sun is shining, we might be stretching the point here – and it’s time to race down to the newsagent for a bumper edition of your favourite comic. The big debate was generally whether Dennis the Menace could take Desperate Dan (the office remains divided on this point) and which of the Bash Street Kids you could identify among your classmates (we skipped this one as it was only ever going to end badly).
Now, some of us gave up comics because we outgrew them, some because we had to and some not even then. But we all retain a warm affection for summer specials (and when we see what some of them are changing hands for online, wish we’d held on to more of them). Anyway, when it came to this year’s Guide to Direct Investing we thought we’d treat our hardworking (and terrifying) Chairman to a trip to the seaside.
COME AND HAVE A GO: THE (LATE) SUMMER SPECIAL is not just a trip down memory lane, it’s a lang cat away day.
We had a lot of fun putting the Guide together but that didn’t distract us from the serious business of market updates and pricing analysis to help investors as they navigate direct platform investing.
The usual pricing updates are present and correct and we take you through who’s moving and shaking respectively. The direct market has seen a few changes in the last year and we have all the headlines. Regulation is as regulation does, rinse, repeat. But some of it is driving change for direct investors and we look at two topics in a little more depth.
First, there is greater transparency around the transaction costs that you have probably always paid but didn’t know about specifically. This is a good thing, but transparency does not equal clarity. Having all the pieces of a jigsaw is no use if you don’t have a picture of what the finished article should look like.
Our second topic is the rise in apps that let you see your whole financial picture (savings, loans, investments etc.) in the one place and manage them. It’s about visibility and control rather than somewhere to physically put your money. Again, this has potential but there are issues to resolve first.
We feel we should make holidaying investors aware that there is no free game, catapult or lollipop included with the Guide. It is, however, packed with heatmaps, vaguely disturbing cat pictures and a squirrel joke which explains why the Financial Services Compensation Scheme will no longer take our calls.
It’s all there for the downloading. Or, if we’re being strictly accurate, it’s all here. Go on, you deserve a bit of late summer sun and fun.
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