Aviva Investors became the latest fund group to pump money into a robo-adviser earlier this month, which begs the question of whether online investment managers require institutional backing to take them through to profitability.
Aviva bought a majority stake in Cardiff-based Wealthify last week for an undisclosed fee, following the likes of Allianz Global Investors, BlackRock and Schroders, which have all made forays into the growing sector.
‘It was a deliberate decision on our part to seek a strategic investor,’ said Richard Theo, CEO of Wealthify.
‘For us it was the reach that this partnership provides, so that we can target many more customers than we could garner with any marketing budget.’
The deal was differentiated by the fact that Aviva became the first UK fund house to take a controlling stake in a robo adviser, with the asset management giant planning to operate it as an external service that can be used by its rivals, according to Theo.
Despite selling a majority stake in the company, Theo insisted: ‘We retain our independence from Aviva and will continue to market and sell directly to the consumer and this will allow us to seek other exciting distribution partnerships with anyone looking for platforms like us.
‘We can also now go to our partner Aviva for capital needs in the future.’
Scalable Capital similarly attracted a strategic investment from BlackRock in June and chief marketing officer and co-founder Ella Rabener says that such investments can be helpful for the cash hungry start-ups.
‘These investors share our view, that robo advice will become an important part of successful asset management offerings in the future and that it is at a minimum helpful to run a B2C service beyond your internal offering to get customer feedback,’ she said.
Altus Business Systems’ principle consultant, Simon Bussy, believes many online wealth propositions will require institutional backing if they are not to ‘die’ while they build both reputation and assets.
‘Based on our own consumer research and what we’ve witnessed in the US (and, more recently, in the UK), we believe that brand (a trusted reputation), scale (through an extensive customer base), and reach (deep marketing pockets) are critical for success in the digital advice space,’ he said.
‘So whilst some differentiated disruptor digital advice propositions may survive, many will need to either pivot their business model or find a rich institutional investor… or die.’
Loss making and cash hungry
Schroders bought a stake in Nutmeg back in 2014, with Allianz taking a holding in Moneyfarm in 2016.
Nutmeg, with £600 million in assets under management (AUM), is the UK’s largest robo adviser, but it has continued to make losses. These widened to £9.3 million this year despite turnover growing 50%, underlining the high cost of both tech development and customer acquisition.
But institutional investors are not only a source of funds for robo firms, they can be a route to building AUM. Scalable Capital last month partnered with ING Bank’s German arm to provide its investment management service to the bank’s clients.
‘I don’t think you need strategic investors. The B2B2C partnerships will give you access to potentially millions of clients that are already the customers of your partner and they get access to a ready-made independent service provider,’ Rabener said.
‘It makes a lot of sense, with lower customer acquisition costs, instead of spending marketing budget to acquire them yourself, the service is bolted on to an existing platform. It’s always been about customer acquisition, even if how you go about that is different.’
She also warns that strategic investments could be a ‘double-edged sword’ for a robo adviser, as the new asset manager-owners can often have different strategic goals.
As Bussy warns: ‘Taking a majority stake will, assuming the agreed commercial targets and milestones are met, no doubt lead to full acquisition further down the line. Let’s face it, for many people who work hard to set up and establish a business – in all walks of life – that’s absolutely the goal.
‘The key during this transition period is to ensure a smooth handover to the new management team; one or two of the original “fintech” board may remain in situ for a period in a part-time or consultative capacity to support this.’
Netwealth, which has an average account size of over £300,000, has another tactic altogether.
The online wealth firm recently attracted £10.02 million from 13 City grandees, including Jupiter’s Edward Bonham Carter and Land Securities chair Dame Alison Carnwath.
The funding is believed to provide Netwealth’s cash needs for the next three years, around which time the company expects to become cash positive.
‘At the retail end of the market these partnerships can make sense where mass access is so important,’ said CEO Charlotte Ransom. ‘In the wealth management market the service offering and approach requires a different type of solution.'