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