'A lot of money has been invested in them and it feels like today’s dotcom boom in many ways,’ says George Higginson on the rise of robo-advisers.
The joint managing director of Alpha Beta Partners has just been through the process of designing a discretionary investment manager from scratch and although he looked at the robo model, he could not escape the conclusion that people still want to deal with people. He also believes that the adviser market is where the real opportunity is, with technology more of a facilitator and means to keep costs down.
‘We stepped back and looked at the robo investment market, but I believe in hybrid financial services,’ he says.
‘A lot of people are either a tech wizard or a Luddite and often there is little in between. We ended up with a model that took some of the technology of the robo firms, combined with our own institutional investment team.
‘I’m a great believer in technology – our model is we want to work with advisers who do not have the scale to build this themselves. With the direct to consumer market, robo is pretty dumbed down and I don’t see why all these clients will suddenly want to use them.’
It is early days, but the firm has just launched initial suites of six passive risk-graded model portfolios priced from 0.33%, and six blended passive and active funds charging from 0.46%. These are run using a combined quantitative and qualitative approach.
Higginson says he is already having ‘interesting conversations’ with a number of potential adviser partners and the IFA world is certainly one that he knows well. While at Zurich, where he worked through the late 1990s and early 2000s, he oversaw the setting up of its adviser business, Openwork.
He later left to go it alone, becoming a founding director of IFA network Intrinsic Financial Services in 2005. He then went on to take the reins as CEO of Sesame Bankhall for two years before spending a couple of years as a consultant, working with the likes of Aviva, Aegon and Royal Bank of Scotland.
Higginson’s switch into the world of discretionary fund management (DFM) is perhaps a more natural extension of his career path than it might immediately appear though.
‘When we set up Intrinsic, after a few years we expanded. I did a lot of work with Ernst & Young ahead of the retail distribution review (RDR) and commercially we were looking at where we could move up the margin chain. In 2007 we launched our own funds for our internal restricted advisers,’ he says.
‘Old Mutual later bought Intrinsic and they are still running the Cirilium funds and they have got several billion in them.’
Similarly, while he was at Sesame Bankhall the company established a platform partnership with Axa Elevate and set up a joint venture fund business with Henderson, which he now describes as ‘all steps on that journey [to running a DFM]’.
The seeds of what was to become Alpha Beta were sown in late 2016 when he was approached by an old contact, who was an investor in authorised corporate director (ACD) firm Host Capital.
Higginson still had a few months left with RBS, where he was restructuring the bank’s mortgage division, but work on a business plan started in earnest.
Initially, the idea was for Host to expand into fund management, but the concept morphed into a separate business. After any thoughts of launching a robo-adviser were rejected, so too was the idea of buying an existing sub-scale fund manager. Starting afresh would afford a blank sheet of paper, unencumbered by legacy issues.
With the company now up and running, Higginson describes 2018 as being ‘about doing the hard yards and getting the core building blocks in place’. The initial suites of funds are accumulation vehicles and these will be followed by income versions over the summer.
The current focus is working with the major platforms to ensure the funds are accessible, removing a barrier to potential clients coming over.
‘We are putting the funds on different platforms before we start taking client money and have gone for the big institutional life ones first,’ he says.
‘We’re not saying you must use our platform or change the one you are on, we are saying you can use it where you are.’
When this process is completed, then Alpha Beta can really start to get out on the road, building a client bank. Higginson is excited and believes that the opportunity is huge.
From RDR enhancing transparency, pushing down fees, to suitability, the growing need for scale in light of rising regulatory costs and the vast opportunities thrown up by pension freedoms, he believes multiple drivers mean that the adviser outsourcing story has much further to run.
‘It’s an interesting market – transfers are big business and there is a lot of legacy business paying high fees still to be tidied up,’ he adds.
Higginson splits his core clients into two main segments. The first being what he describes as a ‘traditional small IFA with maybe £50 million of assets under management (AUM) who wants help and a centralised investment service, but doesn’t want to join a network or sell to an aggregator’.
The second client type is larger, typically with £200-500 million AUM, so they are ‘at a stage where they need to take on a chief investment officer and investment team, but they are facing challenges with the cost and liability of that’.
All clients will be able to take different levels of the Alpha Beta proposition, for example just the passive-focused suite, if desired, and they can all be white-labelled. Larger clients will also be able to tailor a proposition, if they have very specific needs.
Higginson is sanguine about the challenges of setting up a new fund management business at a time when scale is the watchword, with fees and margins being squeezed. He insists that both Alpha Beta’s management and shareholders are in it for the long term.
The plan is to get to £2.5-3 billion AUM in five years, but as a veteran of start-ups, he admits that this can only ever be a target.
‘This is the third time I’ve done it [built a business] in different guises and things always take longer than you expect. It will take five years to build it out, but that depends on whether the market is positive, you get the right clients, etc.’ he says.
‘The guys who are involved have been around and are lucky enough to have made a few bob. We are not building it with private equity backers saying “you must flip this in three years”. It is reassuring to advisers.’
Underlining the management team’s commitment to the business, they have not been taking salaries, so they are not ‘draining money out of the company’. The directors all have an equal shareholding to avoid any one dominating, and this has also seemed to be reassuring to external investors. The firm is in the process of completing a fundraising round to bring in more working capital, with Higginson ‘pleasantly surprised’ at the support they have received, although the figure is undisclosed.
This will mean management and staff own 47% of the firm, with Host Capital having a 28% stake for helping to build out the funds and private investors owning 33%.
For Higginson the role is about far more than merely raising the value of his equity stake though, and he has a visible passion about his new venture.
‘I’m not sitting here saying I’m building this business because I need a lump sum of money for my pension. I’ve been very lucky to have built and sold businesses. It’s not about scale and vanity, it’s about doing something you believe in with people you trust.