In a business which has prospered on equal parts genuine breakthrough and overblown, bikini-clad hype, the star turn at last week’s annual Mobile World Congress was prosaic enough that one well respected analyst, in a much-quoted note, called it a ‘damning indictment’ of the entire industry.
Even as Sony attempted to drum up enthusiasm for its new 4K HDR screen, LG boasted that its new 16:9 ratio was ‘made for split screen apps’ and BlackBerry attempted a last roll of the dice, there was little doubt about what the public was actually hungry for: news of the rebirth of the Nokia 3310.
There can be few better illustrations of the confirmation bias and skewed perceptions that insider status can confer than widespread bafflement that, a decade after the launch of the iPhone, what people were really now interested in was a 17-year-old brick phone that allowed them to play Snake.
At the same time as the telecoms industry was receiving a lesson in the limited marginal utility of a few thousand more pixels to the average consumer, robo-advice firm Wealthify was gambling that the investment industry has been labouring under a similar set of audience misconceptions.
The company, which had previously done little to distinguish itself in the field of me-too business models which have ridden the post-Nutmeg wave, neatly flipped the idea of investment costs on its head by abandoning the lower bound on client assets: it now offers a full-service portfolio from £1.
‘Our rationale is democratising the process of investment, to people who have not traditionally invested, says Dr Richard Theo, serial tech entrepreneur and Wealthify co-founder and chief exec.
While the company points out that the lower threshold of £1 is a technical, accounting limit and is keen not to get to hung up the idea that it will be running a long tail of portfolios valued at little more than the average loaf of bread, the round number does offer an irresistible discussion point.
Wealthify will not be making money at that entry point says co-founder and chief investment officer Michelle Pearce, but neither will it be burning cash to keep them running – and she points to a body of behavioural consumer data gathered by the company in its first year of operation, in addition to academic research, showing that people who start the saving habit stay with it and grow with it.
‘Even on the basis of one year we have been able to verify that the overwhelming majority of people who sign up, stay, and increase what they contribute,’ she said.
‘We can evidence that. It is comparable to people opening cash ISAs – they have an average holding period of five years. The average investor has increased their contribution every month since launch. The attrition rate has been minimal. And we are confident that we can extrapolate from that for the foreseeable future.’
The business had largely kept its head down until it had one-year performance numbers to quote and boasts a website which, while attractive and engaging, features the same hipster-accessible imagery that is the now sector-standard (artful photography of twentysomethings in artisanal jewellery, quirky waistcoats and tattoos, with at least one Shoreditch barista beard). But to those who looked for it, the evidence that the company had above-average potential was there to see.
Theo in particular has launched a series of tech start-ups, with health insurance price comparison website ActiveQuote arguably the most successful, winning him a Queens Award for Enterprise last year and earning a place in the 2016 Sunday Times Hiscox Tech Track 100 league table of the fastest-growing sector firms. He argues his relative outsider status in the world of wealth management is an asset rather than a liability.
‘I would consider that to be an advantage – having come from a background in software design, it has allowed me to come to the industry with fresh eyes. You tend to hear a lot of “you can’t do it like that” and “it works this way”, which are music to the ears of a software person.’
Much of the potential of the software platforms which have enabled what Theo describes as robo 2.0 have been missed by most incumbents, he adds: the value in the proposition will be to create a new mass-market audience rather than migrating wealthy, advice-led clients to a low-cost platform. Like the tech majors touting the latest incremental improvements in response times and camera lenses, they have lost sight of what the average potentual user actually values.
‘There are parallels to the way price comparison worked, and the private client world. Both have become rather stuck in their models of distribution.’
ActiveQuote successfully cracked health insurance comparison – and won it white-labelling contracts with sector blue chips such Gocompare.com and Confused.com – by recognising the limits of technology, following up online inputs with human contact. The world of investment is ideally much lower friction however, and should involve the minimum amount of provider intervention, he adds: for instance the company says it will never offer advice.
‘We have made a virtue out of our simplicity,’ says Theo. ‘People just want ease of use. People frequently don’t want the cost of advice and lots of complexity. A big part of the paradigm of the internet has been to cut out unnecessary points of contact, and a lot of people’s first experiences of investment has been of self-investment, which is often a disastrous experience for them.’
While relatively low barriers to entry and the hot war of pricing competition have seen the number of sector competitors explode, he believes that the current wave of interest is now close to exhaustion. Those that are able to reach a sustainable scale from here are likely to either be those with the sharpest messaging or with the most efficient and portable technology which they are able to take the financial giants who increasingly seeing the sector as a threat and opportunity.
‘According to the latest research, robo-advisers are expected to manage around 10% of global assets by 2020, or around $8 trillion, according to Business Insider Intelligence. Inescapably, we all know that digitisation will remove costs, and that will be a driver of who benefits from that.
‘Banks withdrew from advice. We are actively offering our API [application programming interface, tech shorthand for white labelling] to partners including major banks, and have dialogues going with seven or eight of them. There is no guarantee that those will come to anything of course but we are convinced that is going to be the next stage in the evolution of this sector.’
While the company’s proposition is only now clicking fully into shape, the firm has already secured the funding to support it for the anticipated four-year journey to profitability. That consists of seed funding from its principals, who include Richard Avery-Wright, chair of the business and head of Guernsey-based RAW Capital Partners, who was instrumental in introducing Theo and Pearce.
The initial round of self-funding was augmented by a crowd-sourced funding round last summer which raised £1.1 million in return for 9.3% of equity capital: an arguably risky approach which Theo says was nonetheless a worthwhile gamble in creating a sense of community and as an active demonstration of its values.
‘We saw raising money [via crowdfunding] as aligned with our mission. Yes it was a calculated risk and there was no certainly that we would raise our target, but 760 [investors] supported us, and they will hopefully become evangelists for what we do. It’s very aligned with our values.’
The company is certainly not shunning traditional sources of capital however, and with a demonstrable business model is now talking to traditional venture cap about a C funding round.
In common with the rest of the sector, the business is not yet reporting its asset base, although it points out that because it is not targeting high-net worth clients, it views user volume as a better measure of its success than total funds.
‘We are not currently releasing AUM,’ says Theo. ‘The genuine truth is that it as a business, we are not really focused on it as a metric of our success. Being digital, the number of clients is a much more important to us, and our revenue growth projection is linked to the average held within each [account].’ The company is not yet releasing client numbers either, however.
The tangible evidence of its success which the company is prepared to publicise is the one year risk-rated performance, which Pearce attributes to some astute asset allocation calls by her team, either over-ruled or emphasising some of the quant turning points anticipated by her black box.
A Brooks Macdonald alumni who joined the business via its 2012 acquisition of Spearpoint, she says the a-ha moment which led her to a tech challenger was helping put together the company’s first offshore model portfolios, and the dawning realisation that the expensive sales people in sharp suits were contributing more in costs than revenues.
The balanced – or ‘Confident’ - portfolio returned 18.2% over the year to mid-February versus an ARC average of 17.08%, while the upper end of the risk spectrum offered particularly strong relative returns, with the Adventurous portfolio returning 28.5% versus 23.4%.
‘On the news that we were in leaving the European Union, we immediately noted the drastically increased liquidity risk to UK property funds, so overrode the algorithms recommendation and sold down all holdings immediately,’ says Pearce. ‘Operating a mass market service means that liquidity always needs to be at the front of our minds.
Markets in numerous countries have had a phenomenal run, aided by loose monetary policy which has sent [Price to earnings] soaring. Currently weightings across all five of our investment styles are skewed away from more expensive markets in favour of cash equivalent funds.’