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D2C’s big CPA day out: Nutmeg’s results and Vanguard’s plans

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HEALTH WARNING: We’ve had some fun guessing at Nutmeg’s figures in this blog. Our guesses are just that, and we don’t make any claim for their accuracy. We’d love to have accurate figures, but until we do please treat any figures in red as (hopefully) interesting, but no more than that.

If you’re interested in the direct-to-consumer investment space, today is a pretty fascinating day. We got two pieces of news that those of us who study these things have been waiting for – Nutmeg’s 2015 results, and confirmation of US giant Vanguard’s long-awaited direct proposition.

Let’s do Nutmeg’s numbers first.

TURNOVER £1.7m
OPERATING EXPENSES £10.8m
FY 2015 PROFIT (LOSS) (8.9m)
CASH RESERVES £9m
PROFIT & LOSS ACCOUNT (£20m)
HEADCOUNT 58
WAGE BILL £4.4m
AUA Not disclosed
CUSTOMER NUMBERS Not disclosed

So first let’s talk about those losses. Nutmeg clearly works like a tech business as much as an investment one: lots of investment in the early years and (hopefully) gravy thereafter. However, that magical acceleration of revenue and the accompanying reduction in the crucial Cost Per Acquisition (CPA) figure which tells us how much it has to spend to get each customer on board is yet to happen – and Nutmeg has been around since 2011.

I am confident this is all anticipated and expected. But with a £10.8m cost base and £9m in the bank, Nutmeg has exactly enough money if it keeps revenue the same to last one more year without requiring reinvestment. That year finishes in 3 months’ time. If it doubles revenue again (which it might well) and keeps the cost base steady then it can last another six months or so before running out of money. Either way, we predict another fundraise at some point.

If there is another round, it will be interesting to see who gets involved. Massimo Tosato, the Schroders representative on the Nutmeg board, will retire from Schroders at the end of this year and we wait to see if his enthusiasm is replicated elsewhere in the organisation.

Do losses matter? Not if you’ve got ready access to capital. The real question is whether Nutmeg still does.

It’s worth saying that Nutmeg seems to have made big strides in 2015. Its customer numbers are up by over 50%, AUA by over 100% and AUA per client is up over 35%. This is good stuff, although it’s inexcusable that Nutmeg doesn’t disclose its numbers. It’s starting to look like it’s ashamed of them, and it doesn’t need to be.

NEVER MIND, NUTMEG, WE’VE GOT YOUR BACK

Happily, we’re a helpful bunch, so we’ll do some numbers for the Nutmeggers. If they’re wrong then Nutmeg is welcome to correct us. This is the bit that the health warning at the top refers to.

Revenue of £1.7m is our key here. Nutmeg’s charges range from 0.3% to 0.95%, and we’re going to take a composite rate, which allows for the fact that most savers likely have relatively modest amounts, of 0.75%. From there it’s just arithmetic – £1.7m / 0.75% = £227m at end 2015. If we’re wrong and the average charge is half that then we’re up to £450m, because maths. Our estimate is much lower than others have published, but ‘rithmetic is ‘rithmetic.

We’re going with the first of those figures, and we’ll assume that each client has on average about £25k on the platform. That would give the platform just over 9,000 customers, which is quite a nice base to work from.

We’ve done a bunch more numbers behind the scenes – contact us if you want details. It all comes out with a CPA of over £1,000 which might take 7 years or more to recoup.

All of this is guesswork and bound to be wrong. But this kind of process is what you need to do when you consider the economics of online investment platforms and robo-advice (there’s nothing special about advice in any of this). It’s CPA that kills you.

We’re fans of Nutmeg here at the lang cat; we’ve even given it an award from time to time. The market needs its disruptive influence, and its product looks lovely. It might even perform well over time. But if it can’t get CPA under control, it’s never going to get ahead of the curve, and inevitable increases in operational cost will hurt more than they might.

D2C is a hard game.

VANGUARD BREAKS COVER

As if to pile on the misery, Vanguard has broken cover to say that we’ll see its (presumably) LifeStrategy D2C offer within 6 months; we’ve heard rumours of January which would make sense as Vanguard will want its offer out there for whatever ISA season there is in 2017.

What will it look like? We don’t know, but if we were betting cats it would be LifeStrategy plus a minimal additional charge – and maybe no additional charge at all. If we allowed an extra 10bps or so, that would get them in or around the all-in rate of 40bps. That plus the Vanguard muscle and brand name could be a big disruptor in its own right. For sure LifeStrategy money on HL and other platforms should, by rights, flood over – especially if Vanguard can get a white-labelled online pension to market. Just like Nutmeg has done.

The potential difference between the two, apart from total solution cost (which probably isn’t a huge driver)? Cost Per Acquisition again.

It’s getting frisky out there, folks…and if you think it’s bad here then check out what’s happening over the water. Brutal.

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About Mark Polson

lang cat founder and boss. Expert on all things platforms, pensions and investments. Prolific writer and public speaker, even when people ask him not to be. Knows more about Scandinavian black metal than you, and isn't afraid to prove it.