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While plenty of fintech start-ups are competing in the areas of equity crowdfunding and peer-to-peer lending, far fewer have dared to venture into full-scale wealth management, a business renowned for being built on personal relationships between buyers and trusted advisers. Nutmeg stands out as a rare example of a new, online, discretionary investment management company.
“I’m not surprised few people have been tempted to do this. You need to be fully regulated by the FCA – which for us took six months – you need a lot of capital and partnerships with custodians who expect you to walk through the door with £1 billion of assets already under management,” says Nick Hungerford, chief executive. But in three years Nutmeg has attracted over 40,000 users with a promise of low fees, transparency of investment process and good customer service.
Nutmeg asks customers to fill out an online questionnaire to establish their investment aims and risk appetites. It then takes in their funds – as little as £1,000, but requiring £50 per month top ups for anything under £5,000 – up to £500,000 or more. Based on risk appetite and tolerances, Nutmeg segments customers into one of 10 buckets from cautious to aggressive, for which fund managers build diversified portfolios of exchange-traded funds allowing allocations to UK, various geographic and global bonds and equities, cash and other assets, including commodities and property.
The fund managers monitor and rebalance these portfolios for investors as the risks and rewards shift on the asset classes. For all this it charges a single all-inclusive fee ranging from 1% for funds investing as little as £1,000 down to 0.3% for those investing over £500,000.
Game changer
In a business where fees are invariably opaque but investors can often pay 1% to 2% in management charges to advisers on top of all the other underlying costs for individual funds in their portfolios, plus start-up fees of up to 3% and other friction costs for adjusting portfolios, a 0.3% fee is an absolute game changer.
“In our first two years, I was flattered that we had a number of senior executives from the established companies through our doors who all were enthused and declared that they too would embrace transparency and low fees. They then went back to their offices and carried on much as before,” says Hungerford. “I don’t mind that. It takes time to build market share in a business based on trust. Some of the established companies have been around for 300 years. We’ve been here for three. They can own the next five years. We’ll own the 25 years after that.”
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Some of the established companies have been around for 300 years. We’ve been here for three. They can own the next five years. We’ll own the 25 years after that Nick Hungerford, Nutmeg |
Thinking back to the original business plan for Nutmeg, Hungerford now realizes that its founders were mistaken in assuming that many of its customers would be first-time users of wealth management services. The typical customer is in their 30s, often working in what is still termed in Britain a profession – law, medicine – and quite comfortable with internet technology. In fact, many have been investing for some time on a do-it-yourself basis, while others are coming from established names, sometimes trying Nutmeg with just a portion of their funds to test this newcomer out.
Hungerford reels off customer anecdotes. “I met one lucky young fellow who came to invest with us having got £15 million. We worked out that over 40 years of investing with a traditional wealth manager he would have paid out £13 million in fees. It’s just outrageous.”
And while Hungerford realizes that the human relationships binding the wealthy to certain firms are strong, he points out they are not insurmountable. “Advisers often change firms. Coverage of clients is not continuous. And clients should note how rarely traditional wealth managers market themselves on transparency of fees and investment process. I had one customer who transferred a portion of his family money to us after hearing me on the radio. He got in touch to say how excellent we were. He said he couldn’t transfer all his wealth at once because he’s known his current broker for 17 years and he lives in the same village, but he’ll move more over time. There will come a time when the economic argument – on the difference in fees – to speed that transfer up just becomes compelling.”
Simplicity
Simplicity is key, as shown in the allocation to low-cost ETFs, and the main effort of investment managers is towards asset allocation. There are no early redemption penalties for clients. Bank of New York acts as custodian.
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It’s revealing that Hungerford should have moved from Silicon Valley to London to launch Nutmeg. Like all fintech entrepreneurs in the UK he praises the FCA for its supportive attitude and responsiveness. He also likes the ecosystem being cultivated by Innovate Finance. “Having a lot of people in a dense space all concentrating on the fintech sector does foster a spirit of collaboration. London might benefit from closer involvement from the academic sphere. If you dropped Stanford University into London, this city would be the fintech centre of the world.”
As to capital for the venture, Nutmeg closed a £30 million funding round last year that brought onto its board venture-capital firm Balderton Capital, as well as 200-year-old institutional fund manager Schroders.
Is that a pure financial investment for Schroders or the old established order keeping a close eye on the new disruptor? A lot of start-ups in the financial industry end up being bought by the very firms they set out to take on. That’s the exit many aim for from the start.
