Digital transformation is something the investment management industry needs to embrace but at this time of change investors need to be wary and not forget the benefits of working with an established business.
Considered by many to be a traditional industry, financial services and, specifically, investment management, are not immune from the march towards digital transformation.
With many people either disenchanted or disenfranchised from current advice regimes, there is a significant opportunity for businesses able to service the mass market. Technology is critical to cracking this demand, both from a client engagement perspective and operating efficiency.
The emergence of many new digital firms is, therefore, to be welcomed, especially if they offer genuine value and enhance the accessibility of savings and investment. But there needs to be a 'buyer beware' warning here. Aesthetically pleasing online or digital advice ‘journeys’ should not mean investors ignore some of the fundamentals of selecting a suitable home for their hard-earned savings.
The number one priority is security, and not far behind that is longevity; how long will the business be around for before it is bought out and swallowed up by a competitor? How stable is their financial backing? Does their investment proposition have a demonstrable track record of investing through the good and the bad times?
Recent business closures, takeovers and fundamental changes to the offering in the wealth space have shown that creating a sustainable business in a heavily regulated industry is not an easy challenge.
High customer acquisition costs are proving problematic
One recent example of this is Wealthsimple, which closed its doors to the UK in December 2021, shutting off services to some 16,000 customers representing £272 million worth of assets.¹ In doing so, the Canadian firm became the latest entrant to a growing group of robo-advisers who have taken such action despite the continued growth in FinTech.
Indeed, earlier in 2021, we saw Scalable Capital end its quest to close the UK advice gap by quitting the UK robo-advice market.² And even before that, we saw other similar services bow out of the market including Moola.²
According to commentators, the problems in each case are similar – heavy advertising and marketing costs to acquire new customers coupled with tight margins on a per client basis.² Some even believe that these recent incidents are just one of "a number of casualties to come" in the robo-advice space thanks to market saturation and fierce competition.²
Customers left to pick up the pieces
The problem is that every time one of these wealth firms closes, their existing clients are plunged into uncertainty. Investors will face the dilemma of choosing from a range of unknown or unappealing options, including selling their investments, transitioning to an alternative platform selected by the failing business, or finding a suitable alternative themselves.
Whatever the scenario, it will certainly not be one they expected when signing up.
When it comes to your personal finances, the stability and maturity of a business are important. The company's financial strength, the quality of its service offering and the consistency of its investment track record should be key considerations. The last thing an investor wants, especially a retiree dependent on the income from their investments, is extraneous upheaval to add to the inherent volatility of investment markets.
So what can investors do to ensure the durability of a provider and, by extension, consistency of service?
Financial statements and fees: A cursory look at recent annual reports should provide an idea of whether the wealth manager is running a sustainable business model. Remember, cheaper isn't necessarily better – if a wealth manager is severely undercutting the competition to win market share, they may be putting their balance sheet under unsustainable stress. With a new market entrant, you would want to see clear evidence of adequate capital resources to sustain the business through its early stages of development.
Existing portfolio performance: Again, this should provide an idea of whether the wealth manager's service is actually working. Beware of ‘proforma’ portfolio performance built on seemingly sophisticated back-tested models. Anyone can drive around the track once the race is over. What you should be looking for is the consistency of risk management and relative volatilities of portfolio models through a few investment cycles.
Average client tenure and feedback: This provides a good gauge of how well clients are treated on an ongoing basis. But what it also stands to provide is some insight into how important a particular wealth manager's UK operations are to its overall business model. For example, if they are understaffed in the UK, and it is negatively impacting their client service in the area, it might provide some indicator of where the business will make cuts first when times get tough.
People: How long have the key people been in post? What is the experience and qualifications of the people who you will be looked after? Indeed, will there be anyone you can actually speak to on a consistent basis? Even firms such as Nutmeg, with their very attractive and sophisticated automated digital offering, found that they had to add that vital human ingredient into the equation in order to persuade new clients to join.
A responsible approach
As highlighted, the point here is not that new wealth providers or robo-advice should be avoided, nor is it that an established track record means a wealth manager's performance is guaranteed. Instead, it is that longevity and consistency should be of paramount interest to investors when it comes to who effectively holds the reins of a great part of their financial lives.
When assessing a wealth provider, remember that it is sometimes their corporate operational and financial robustness that will impact the provision of good performance and service.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.