Some people will be relieved to see Nutmeg announcing a £9m loss, but we think that this masks some important pointers for financial advisers.
Nutmeg had good revenue growth through 2015 and is rumoured to be close to the £500m AUM mark today. If it can contain its costs at 2015 levels – unlikely given that they almost doubled in 2015 – then profitability could be on the cards in 2017. Hold onto your hats… the robos are coming after all!
However, our view for some time has been that delivering the benefits of the digitalisation and automation of investing are not the preserve of the lean start-ups. We’re seeing successes from the likes of LV= Retirement Wizard, an automated advice service, and HL Portfolio+, an active funds robo with £311m AUM – not far off Nutmeg scale for one small strand of HL’s business.
What about financial advisers? Well much of the move towards robo-solutions can be considered to be part of a wider shift to passives with tracker fund AUM accelerating post RDR, doubling to 40% of net fund sales today. However, ETF use by financial advisers has bumped along around 1% of sales. Our latest report, UK Fund Distribution: Passives, ETFs and Smart Beta, which we published this week, finds 14.5% of platform assets are in passives but while this is split equally between tracker funds and ETFs on direct platforms, there is only 1.3% in ETFs on adviser platforms.
Why the mismatch? The ETF providers grumble that platforms aren’t providing a level playing field compared to funds. The platforms cite lack of demand from advisers.
What is holding ETFs back?
What did we find in our research? Advisers are looking to reduce the underlying cost of the funds that they use and, unsurprisingly, that is their top reason for using passives. Most advisers have recommended passives and when they have bought ETFs on behalf of clients it has overwhelming been via a platform.
So far, so good. But, as we discussed last week, running ETFs on adviser platforms is more expensive than tracker funds. Pricing will certainly be an issue for financial advisers recommending ETFs affecting which platform they choose.
The other key issue is fractional trading. This is important to enabling small investments and has a bearing on regular investing plans and managing model portfolios. Nutmeg has cracked this problem and Winterflood Business Services now offer a bolt-on solution for platforms. While this adds an additional layer of costs, Novia and at least one other platform will offer it soon.
Given the squeeze on margins that everyone is experiencing, ETFs might help to save a few basis points within the value chain. As things stand, those basis point are leaking away. This is not the time to be passive about ETFs – platforms need to call the plumber.