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Selftrade’s new pricing structure went live yesterday, and while it is just the latest of many broker pricing updates over the last few months, it may well be the most significant. While Fidelity, IG, SVS and Alliance Trust have broadly speaking made small changes, whether upwards or downwards, to existing price structures, Selftrade have made a more fundamental, almost philosophical change. By beginning to charge a % fee on the value of funds (unit trusts or OEICs) held, it leaves just 4 operators charging a fixed fee for holding funds. One of those, Alliance Trust, increased its prices just a few weeks ago. It does beg the question of whether a fixed fee model for holding funds is sustainable, at least at a level which people with smaller amounts are willing to pay.

Going to brokercompare.info, freshly updated with Selftrade’s new prices, the discrepancy between those operators which charge a fixed fee for holding funds, and those which charge a % fee, is clear. Anyone with £23,000 or more to invest in a funds ISA will see fixed fee operators fill out the top 3 places, assuming 2 fund switches per year and a 10 year investment period. Any fund investors with £60,000 or more to invest sees the fixed fee operators take a clean sweep of the top 6 places (Halifax, iWeb and Bank of Scotland are all part of Lloyd’s Banking Group), and above that level of assets the gap between fixed fee and % fee just gets wider.

With such a discrepancy on price, and incredibly strong brands such as Halifax and Bank of Scotland included, you would imagine that RDR would have led to fixed fee operators acquiring high value customers hand over fist. To some extent, that’s true – Alliance Trust increased its AUA from £4bn at the end of 20121 to £8.5bn at the end of 20152. However, such an increase in assets has not translated in increased profit. In 2015, while AUA increased by 32%, number of accounts increased by 18%, number of trades by 9% and revenue by just 7%. At the same time, annual losses increased by 33%, from £3.9m to £5.2m. It appears that the new customers attracted by Alliance Trust’s fixed fee model are disproportionately wealthy, but also disproportionately unprofitable.

Looking again at the 6 leading operators on brokercompare.info for investing £60,000, they have something in common beyond being fixed fee operators – none of them are rated very highly by companies like Boring Money or the Lang Cat for their user experience and customer service. The primary reason given by Alliance Trust for their recent losses is increased investment in technology to improve the product. It is possible that the wealthier customers who have moved to fixed fee providers over the last 3-4 years demand a quality of service that, at the moment, the fixed fee operators are struggling to deliver. If this has provoked Selftrade’s move to a % fee charging structure, there are at least 4 operators that will be watching very closely how they get on.

There is no doubt that, in general, this sees Selftrade moving from an economical provider to a mid-range one. With no charge for holding funds or for purchasing them, Selftrade used to be the number one choice for people holding funds and making additional regular investments. As the screengrab below from the brokercompare.info dev site shows, it is now much further down the list

selftrade

Based on customer investing £50k in funds and £50k in shares for 10 years, held in an ISA, making 2 fund switches and 2 share switches each year and investing £500 per month split between 3 funds.

For any portfolio including funds, Selftrade has gone from being one of the cheapest, if not the cheapest option, to middle of the pack. However, for share-only portfolios, the reduction in trading fee from £12.50 to £11.75 doesn’t make that much difference – Selftrade remains one of the more expensive providers for trading equities. There is a concern therefore, that while Selftrade will undoubtedly make more money in the short-term from its existing customers, having given away a pricing USP its customer acquisition will suffer.

If it is able to continue growing its customer base even with the new pricing structure, there is a strong chance that the remaining fixed fee operators follow suit. If, on the other hand, it suffers a customer exodus as increasingly price-aware customers choose operators who are more cost-effective for their individual needs, brokers will continue to search for new pricing structures which marry value with service

1http://www.alliancetrustsavings.co.uk/adviser/guides-forms/news/AllianceTrustSavingsReaches5billionAUAmilestone.pdf

2http://www.alliancetrust.co.uk/pdfs/Alliance-Trust-report-Accounts-End-311215.pdf

One We Like: Wealthify

April 25, 2016

By Consulting Group

We’ve often written that despite all the talk about robo-investing in the UK, there haven’t been any true robo-investing providers. That changed earlier this month with the launch of Wealthify, which builds 5 basic portfolios using a combination of algorithms and a human investment team. It’s this element which most differentiates it from Nutmeg, its most obvious competitor, in its approach.

wealthify

We should point out that Wealthify is a previous client  – you can check out the case study of the market sizing project we did for them here – but, much as we like them personally, that’s not why we’re featuring them here. They’ve built a great product, with several innovative features which we think will become integral parts of investing in the future.

One feature which is not offered is any kind of regulated advice. While this is an important regulatory point, the strength and the tone of their comments about it suggest they see their ‘non-adviser’ status almost as a badge of honour. Chief Investment Officer and Co-Founder Michelle Pearce told FT Adviser on the day of the launch,

“What our target audience is really looking for is a very simple ISA and the majority don’t need advice,”

and went on to illustrate the point with anecdotes from her own experience and those of her friends.

Being a similar, though sadly slightly older, age to Michelle, this is a point with which I have long agreed. There is not an ‘Advice’ gap in the UK investment market, there’s a confidence gap. People feel that investing is not for them because it’s too complicated, and they don’t trust professional advisers – in any field, not just financial services. They are much more likely to trust the advice of their family and friends.

It’s this fact which makes Wealthify’s ‘Circles’ feature so interesting. Every Wealthify investor is free to create, join and invite members to an investing circle of their choice. Membership of a circle gives you a discounted fee, from 5% if there is one other person in your circle to 20% if there are more than 50. This is a first step towards making investing social, and getting friends, family and colleagues to discuss investing, help each other and overcome the confidence gap which holds them back from investing at the moment. There is so much more which can be done with this feature in the near future – integration with social networks, and the facility to communicate within the Wealthify site for example – but it is great to see a company finally helping its clients to communicate with each other.

Even without Circles, Wealthify does a good job of simplifying the investment process as much as possible. It is easy, on web and importantly mobile too, to choose whether you want an ISA or not, how much to invest upfront and/or monthly, and the length of time you wish to invest for. It is also easy to choose your portfolio, from one of 5 options – 1 is labelled as cautious, with 5 as adventurous. After viewing your portfolio and entering name and address details, you go through a short, sharp and to the point suitability questionnaire, one of the best of these that I’ve seen, for a couple of reasons. First, not only is it short, all the questions are very clear and objective. Secondly, you get very clear guidance, but not advice, if your answers indicate that your chosen portfolio is not suitable. For example, you’re unable to progress if you state that you don’t have 3 months salary in savings at all (generic financial advice, and therefore not regulated) while if you choose an adventurous portfolio along with a short time frame you get a warning, and can choose either to continue at your own risk or make changes to your portfolio.

The one area where I’d like to see Wealthify further simplify their process is on the choice of portfolio. One is terminology – I’m slightly loathe to criticise as I don’t really have any better suggestions, but I don’t think ‘Cautious’ and ‘Adventurous’ are brilliant descriptions of the relevant portfolios. However, perhaps more importantly, they are not always accurate – the portfolios don’t change depending on investment time frame, so were a customer to invest in portfolio 5 over 40 years it would be a very sensible, but distinctly unadventurous, choice.

In the absence of beneficial suggestions about correcting the terminology, something I would suggest, following on from the Financial Advice Market Review (FAMR), is more support for users elsewhere on the site on how to choose the right portfolio for them. As the FAMR made clear, there is no regulatory barrier to operators providing guidance on choosing how much risk to take. In Wealthify’s case, this could not be within the portfolio selection part of the website, which would be too close to providing advice on which Wealthify portfolio a customer should choose, but it could be provided elsewhere. Regardless of what portfolios are called, this would give new investors much more confidence that they were choosing the right one.

This however, can all go on the product backlog. Wealthify has built an excellent, simple product that can be used by anyone to invest for their futures, and it is unafraid to tackle head-on the challenge of getting people to invest for the first time. With a maximum fee of 0.7% per year and a minimum investment of £250 it is unafraid to market itself to those with small sums to invest, and speaking as one of those Wealthify is sure to receive some of my meagre funds very soon!

Are Brokers Prepared To Be Compared?

April 18, 2016

By Consulting Group

The price comparison industry has changed the way that people choose utilities and insurance, with 30 million Britons using price comparison sites each year.

4providers_even

Although the broker market has historically been neglected by major comparison sites, niche providers such as brokercompare.info show that broker comparison is possible, and the major sites will enter the market in the near future as they look to investment / fintech products as their next source of growth.

Customers appreciate the simple and accessible way in which price comparison sites present complex information, which is ideal for the complex pricing of the broker market. According to an FCA study of comparison sites, consumers believe that,

“they make a potentially boring and difficult job relatively painless”

In the 2014/15 tax year 10.2 million people invested in a cash ISA, compared with 2.8 million investing in a stocks and shares ISA. According to the Platforum, just 15% of UK adults hold risk-based investments, compared with 48% of US adults.1

There is an enormous untapped market for share and fund dealing services, and price comparison websites can help brokers address it. A good price comparison site can give an investor a very good idea of how much they will pay to use different brokers, based on their individual investing behaviour. On top of this, they have an existing market of 30 million users.2

Most brokers are not ready for their customers’ choices to be determined by price comparison sites, but the changes which will be necessary will not automatically lead to a race to the bottom for pricing.

There are three basic pricing structures brokers can follow:

percentage Percentage Fees
hammer Fixed fee for all trades
menu Charge for each service

Each of them can come out at the top of a comparison table for different types of customer.

The challenge for brokers is to offer a pricing structure which performs well for its target customer across multiple channels including price comparison sites.

A broker should be able to analyse how its prices perform for new customers on a price comparison tool, understand the impact of possible new structures for both current and future customers and then ensure its product meets the needs of its future customer base.

Black Swan Partners

Black Swan Partners is a specialist retail finance consultancy with a deep understanding of pricing and price structures within the broker market. We perform strategic analysis of existing customer bases for leading brokers, help to deliver significant cost savings and develop market leading products such as our customer facing comparison tool Broker Compare. Should you wish to discuss any of the topics raised in this paper, please contact us

1http://money.cnn.com/2015/04/10/investing/investing-52-percent-americans-have-no-money-in-stocks/
2Mintel, Web Aggregators in Financial Services, June 2013

All leave is cancelled for salespeople in the retail finance publishing industry, as brokers, fund managers and wealth managers all ramp up their marketing budgets imploring people to invest in an ISA before the tax year ends on 5th April. Meanwhile marketing directors at the same companies are bemoaning their luck at the high profile crash eroding investors confidence at the most important time of the year.

It’s fair to assume that Warren Buffett would see all of this as madness. The sage of Omaha is eminently quotable, and one of his most famous is ‘Be fearful when others are greedy, and greedy only when others are fearful.’ It’s likely therefore that, were any platform marketeers able to bend his ear, he would suggest they encourage their customers that ISA or no ISA, this is an excellent time to invest.

buffett_quote

A more interesting, and certainly more compliant, of his quotes is ‘Do not save what is left after spending, but spend what is left after saving.’ By making the ISA season the focus of their marketing, brokers may be accepting of human nature, but are encouraging their customers to directly contradict Buffett’s advice. Buffett would be more likely to suggest they market a product that many brokers have, but which is rarely used – a regular investing package.

Hargreaves Lansdown has been operating its Regular Savings service for 12 years, and while take-up is increasing only 105,000 (14%) of 727,000 total clients used the service in FY2015.1 Yet the regular savings scheme is better for customers, not just because the fiscal discipline will give them more to save, but because they will tend to get better returns.

There are two reasons for this; money that has been invested for longer has benefitted more from the (generally) rising market over the period and by default you are able to be fearful when others are greedy and greedy when others are fearful. By investing a set amount each time you automatically buy fewer shares when markets are at a peak and more shares when they are in a dip.

Our hope is that April 2016 will not see broker marketing disappearing as it does most years, but a consistent campaign across the year extolling the benefits of regular investing. Unfortunately not all providers offer a regular investing option even though the products that currently exist are not only good for customers, but make very good margin for operators, as the trades can be executed in bulk. More people using a regular investing service will result in more customers with improved savings habits and better returns, and improved margins for brokers – a scenario to impress Warren Buffett himself.

To see how regular investing may impact your trading fees, visit Broker Compare for a market-wide comparison.

For a free consultation on how to successfully implement a regular investing option, please contact us at info@blackswanpartners.co.uk or on Twitter @BlackSwanBSP

1Hargreaves Lansdown Annual Report 2015

No Exit – Stockbrokers And Their Transfer Fees

February 9, 2016

By Consulting Group

Across the stockbroking industry consumers are faced with complex charging structures, which has made it difficult to calculate the expected cost of an individual’s investment activity.

One specific charge, often tucked away in the ‘additional fees’ section, is the ‘transfer out’ or ‘exit fee’ cost. This levy was traditionally implemented to reflect the cost of manually transferring and re-registering stock, however, as highlighted in the FT article ‘Digital transfers increase pressure over platform exits’ technological advancements have rendered this fee almost redundant. In 2015 tech provider Altus claimed that eight of the biggest direct-to-consumer providers carry out live electronic transfers (up from 2 at the end of 2013).

Instead of the providers reducing or removing transfer fees, they remain ever-present and can have a significant impact on the cost of trading. With most providers charging a fixed fee per holding transferred, it costs a typical investor, holding eight assets, up to £280 to transfer an ISA to another provider. This practice effectively ‘locks’ in a user and acts as a major barrier to switching. Out of the 19 execution-only stockbrokers researched only Fidelity, IG and TD Direct offer free transfers out.

Large numbers of potential equity investors are deterred from investing  due to a lack of knowledge and understanding, exacerbated by complex pricing and ‘hidden’ charges such as exit fees.

Better tools to compare broker charges, such as our BrokerCompare product need to include the transfer out costs to help people understand the impact these additional charges can have.

Of course, there has been good work on simplifying fund charges and these still make up a large percentage of costs, but removing the initial layers will help make investing less complex and even trigger its growth. Unravelling fees will allow traditional stockbrokers to compete with alternative investing methods such as algo investors which leverage themselves on transparency and cost.

The table below demonstrates the cost of transferring an ISA account across providers

Company ISA Transfer Cost
(Per Holding unless stated)
AJ Bell £25
Alliance Trust £100 + VAT (flat rate)
Barclays £30
Bestinvest £25
Charles Stanley £10
Equiniti Shareview £35
Selftrade £15
Fidelity FREE
Halifax £25 (max £125)
Bank of Scotland £25 (max £125)
iWeb £25 (max £125)
Hargreaves £25
HSBC £15
IG Markets FREE
Interactive Investor* £15
Telegraph £15
SVS £15
TD Direct FREE
Share Centre £25

*Interactive Investor waives transfer-out charges for up to ten lines of stock (£15 per line of stock after that), if you choose to leave within a year of opening your account.

If you are interested in understanding how your business can improve its pricing, product proposition or consider how algo can be included in your business proposition, then contact us at info@blackswanpartners.co.uk

 

One We Like: Betterment

January 26, 2016

By Consulting Group

We’ve written before about how, despite a lot of media buzz and misconceptions, there are hardly any robo-advisors in the UK at present. However, that is about to change, with the imminent launch of products such as Wealthify and Scalable Capital. With that in mind, we thought now might be a good time to dedicate this month’s ‘One we like’ slot to our favourite US robo-advisor – Betterment. What can the UK ‘robots’ learn from their American cousins?

The most important aspect about Betterment is that it knows its market. Betterment’s low-cost, simple investment proposition is potentially valuable to a huge range of investors, but for most people with less than $100,000 to invest it is a far more sustainable solution than investing with an advisor – a very similar situation to that which we see in the UK post-RDR. Betterment identified an area of the market which was unaddressed, understood what that market required and built a product which provides its users with exactly what they need.

Choosing an investment portfolio with Betterment could not be simpler. To begin, you enter 3 pieces of information – your age, salary and whether or not you are retired. From that point, you have the opportunity to choose one of three investment goals – retirement, safety net or general investing. Pick a goal, and your suggested portfolio mix (the balance between stocks and bonds) will be allocated to you, based on your age and income. Fill in your personal details, commit funds, and that’s all you need to do to invest.

Customers do have the opportunity to change the asset allocation if they wish, but in contrast to other operators asset allocation is driven by Betterment. In this way they take much of the complexity and uncertainty out of picking your investments. This is why they’ve been particularly successful among those new to investing. It is very difficult to be overwhelmed by choice when investing with Betterment. Consequently they have 125,0001 customers, compared with 37,000 at their flashier, more well-known competitor Wealthfront, though with an average investment of around a ⅓ of Wealthfront’s.

Betterment’s model cannot be copied exactly by non-advisory firms in the UK due to rules over advice, but the key aspects can be – they just need to be separated a little bit from the actual investment choice.

There is not an advice gap in the UK – there is a confidence gap. Many people have assets to invest – more than 10 million contribute to a cash ISA each year – but the majority of those don’t have confidence in themselves to choose whether to invest in bonds or stocks, small-caps or large-caps. It is up to investment firms to provide this confidence, by not being afraid to offer non-regulate, generic financial planning advice helping investors choose their goals. By offering this service, and combining this with a simple goal-based investment proposition like Betterment’s, those new to investing will have the tools they need to make good choices, and enter the investment market for the first time.

1https://www.paladinregistry.com/robo-advisor/wealthfront

 

Why Retail Brokers Don’t Convert Clients On Mobile

January 13, 2016

By Consulting Group

While working on Broker Compare, our tool that allows retail investors to choose the best value Stocks and Shares ISA, we started thinking about the role of mobile in this sector.

Broker Compare includes 19 of the UK’s biggest online brokers/platforms and is mobile optimised. So far so good, but only three of the 19 have mobile-optimised account opening.

Why is this? An excuse I heard once from someone in the FX / CFD sector was that ‘no-one opens their account on their phone’, but they were wrong.  Application processes need to be  mobile-optimised.  The gambling sector is being transformed by mobile – in 2014 William Hill reported a 298% increase in mobile betting revenues.’1

It is amazing that the majority of existing brokers/platforms are not addressing this and still don’t look at the behavior of other sectors and a minority of their users to determine how their future customers will behave.

Given this, what kind of reasons apart from budget and resource do we expect to hear from brokers / platforms for their lack of mobile optimised account opening?

Excuse Counter
There is too much info to fill in on a mobile. Well designed forms can easily address this. See Natwest mortgage application (on mobile).
I need to be verified by sending scans of my ID and utility bill. For millennials scanners are irrelevant. Photos of a DL, Passport, bill, even a selfie (location tagged) can be done on a smartphone. See Revolut.
Terms and conditions are too long to read on a mobile. Ts and Cs are too long on PC and mobile, full stop. They should be summarised, but available to review and emailed in both forms and clearly available when it comes to trading.
Why would anyone trade long-term investments on their mobile? The Hargreaves Lansdown app has been downloaded over 400,000 times with 7.9% of share deals completed via the platform in 2015.2
None of our competitors do it. Someone has got to be first. Just look at the effort Atom Bank goes to to collect info pre launch.

 

The reality is that mobile is here to stay and users will continue to do more and more on their phones – a friend recently celebrated the fact that they had applied for, and received, a mortgage offer on their iPhone 5.  This makes the broker platform situation even more frustrating.  Last year Facebook reported 72% year on year growth in mobile advertising.  Now if ad revenue is growing at that rate, but only 15% of equity brokers we looked at have any means of mobile account opening, how are they going to even begin to reach the mobile audience?

Given the situation, where does this leave the sector? It leaves it vulnerable to being upstaged by retail finance companies diversifying into the broker sector including the algo-investing and robo advice companies and the new discount brokers all of which are desperate to build their assets under management through multiple channels.

This is not meant as a criticism of the existing PC (and in some instances tablet) based services offered by leading providers to the existing customers, it is making the point that the penetration of share ownership will remain stubbornly low if providers don’t adapt to attract new audiences.

This spring, when the UK government sells £2billion of Lloyds Bank shares, why can’t all those millennials with an extensively publicised, government-backed excuse to start their investing careers, go to a mobile optimised comparison tool, sign up on their smartphone and invest? It should not be too much of an ask given that latest research shows that the average user checks their phone over 85 times a day…

The table below demonstrates how rare mobile account opening processes are for stockbroking platforms:

 Provider  Mobile Optimised Site  Mobile Account Opening
AJ Bell
Alliance Trust
AXA
Bank of Scotland
Barclays
BestInvest
Charles Stanley
Fidelity
Halifax
Hargreaves
HSBC
IG
II
iWeb
Selftrade
SVS
Telegraph
TD Direct
Share Centre

 

Black Swan Partners is a retail finance consultancy that specialises in product development, market analysis, pricing and social functionality. For a free consultation please contact us at info@blackswanpartners.co.uk

1http://www.stickyeyes.com/2015/02/18/gambling-report-reveals-big-opportunities-in-app-store-optimisation/
2 file:///C:/Users/PC%2011/Downloads/2015-Report-and-Financial-Statements.pdf

Tackling Complex Broker Platform Charges

December 16, 2015

By Consulting Group

Why is it so difficult to compare the cost of share dealing, ISA or SIPP accounts? Technological advancements have given consumers the freedom to shop around for financial products, driven by companies such as MoneySuperMarket, CompareTheMarket, uSwitch and Confused.com. However, while this has proved successful for borrowing, TV and utilities, investments are significantly underrepresented.

Why is this?

In a word – complexity.  Current fee structures are so complex that not even the price comparison sites, let alone the consumers can easily determine how much holding a trading and investment account will actually cost. Now bear with us:

The majority of providers offer three accounts: share dealing, ISA’s and SIPPs but the fee structures vary greatly. Take Hargreaves Lansdown (HL) as an example. HL charges a percentage-based annual management fee on assets held in funds (not individual equities), capped at a not insignificant £4,000 per year. For ISA and SIPP accounts there are additional percentage fees, this time charged on the total value of the assets, capped at £45 and £200 respectively. This is in addition to tiered trading costs that decrease in relation to trading activity in the previous month, charged for trades in individual equities (but not fund trades, which are free).   Halifax on the other hand charges a flat, annual admin fee for an ISA but a percentage, quarterly admin fee for a SIPP, as well as flat trading costs.

Enough said, and those are just two providers. With over 30 different brokers consumers are faced with fees for platform use, funds, transfers, inactivity, exit costs, telephone trades, dividend reinvestment and an array of other additional fees.

This complexity is not a new issue; Holly Mackay’s ‘Boring Money’s Guide to Online Investment Services’ described Barclays Stockbroking charges as ‘hellishly complex to work out if you have both shares and funds,’ and ‘one of the most complex pricing structures around.’  It also described TD Direct’s pricing as being ‘too complex for our liking,’ and TheShareCentre’s as ‘really hard to work out.’

What is Black Swan Partners doing about it?

With a great deal of experience working alongside broker platforms, Black Swan Partners knows that complex pricing is not a necessary evil. Whilst the industry has services such as ComPeer it is time more effort was put into ensuring consumers get the information they deserve. We have developed The Black Swan Partners BrokerCompare tool, that allows consumers to calculate the projected cost of a bundle of investments across a selection of share-dealing providers.

Whilst taking into consideration a number of listed assumptions, the tool calculates the annual and 1st year cost of the service. It also provides a breakdown of the charges including platform fee, fund, total trading, ISA, SIPP, regular investment and exit fee costs. Providers are ranked from cheapest to most expensive. More experienced investors can input a mixture of shares and funds, add to their investments monthly or annually, use tax wrappers such as SIPPS and ISAs and specify how they will trade across the year.

It is early days, but the result is an easy to understand tool that clearly outlines how much a user will be expected to pay for their investments over a given period. The tool is currently limited to  Interactive Investor, Hargreaves Lansdown, SVS Securities, Halifax, Fidelity, BestInvest, TD Direct, Alliance Trust and AJ Bell, with new providers being added regularly, but also on request.

We pride ourselves on helping companies ensure their clients achieve better financial outcomes and we believe this tool is a step in the right direction for the sector.

If you have any comments, questions or suggestions or are a provider that would like to be included, please feel free to tweet us @BlackSwanBSP or email us at info@blackswanpartners.co.uk.

 

Social sign on has become an integral feature of websites and apps in almost every sector. The ability to log-in to any new product or provider with a couple of clicks, and without the need to create and remember a separate password, has become so familiar that being confronted with an application form and asked to type your name and email address feels very much behind the times.

Finance firms have tended to be behind the times regarding ‘social’, so it is no coincidence that the one industry stubbornly refusing to embrace social sign on is finance. By ignoring this opportunity firms are not only making life more difficult for current and potential customers, they are also missing the chance to connect their customers to each other. The use of social sign on means firms can access customers contacts lists, and can then show users which of their friends, family or colleagues are already using their service. This provides endorsement, but it can be used to encourage users to communicate with each other.

Some of the biggest, most innovative and most successful companies in the world make use of the contacts of their customers to promote referrals and, often to enhance the overall customer experience. Spotify is a particularly good example of this – if signing up with Facebook, users get the chance to access any playlists that their friends have put together.

Spotify_comb1

We have long been advocates for social functionality for investment firms, and this doesn’t need to be revolutionary. As a starting point, incorporating a messaging feature into an investment product would allow users to talk to each other about the investments they’re making, and could help new and inexperienced investors become more comfortable with the investment world. However, even without the messaging feature, by using social sign on, and showing users customers they already know, firms can promote this sort of dialogue, and hopefully endorsement, offline.

A common reason offered by financial firms for not using social sign on is that it doesn’t collect all the information required to verify a customer for anti-money laundering purposes, but this is a weak excuse. Clearly firms in the financial sector have to collect more information about customers than social sign on alone can provide, but just because you have to ask customers to type in their address does not mean you have to oblige them to type in their name and email address as well. Another reason that does not stand up to scrutiny is that many customers may not want to link something as important as their investments to their social media account. This is almost certainly true, but those customers would remain free to sign up in the traditional manner.  Additional security can also be applied for different levels of access to a trading account if required.

All in all, the use of social sign on is a very simple, cost effective and proven way to improve the customer experience for those customers who wish to use it. It has the potential to facilitate conversations between customers that will boost a firm’s referrals and improve conversions. It is the modern way, and it is time it was embraced by the financial services sector.

 

Who Are Your Future Clients?

November 30, 2015

By Consulting Group

Whether we are talking to large corporates or fintech start-ups we get asked the same question in many different ways – who are our future clients?

A product should always be designed to be engaging and inspire loyalty, but market penetration, rather than loyalty, will always be the biggest driver of growth. The average number of products held by Australian personal banking customers is 2.0.1Think about it from your own experience and  this probably rings true. I personally only hold a current account and a credit card with ‘my’ bank. The home insurance, mortgage and FX services went to other brands a long time ago, and while I generally try to follow a ‘Black Swan’ approach, in this respect I suspect I’m fairly typical.

Big multinational consumer brands invest in extensive (or expensive) external qualitative and quantitative research to help them understand the future, but smaller brands, faced with similar penetration and frequency of buying challenges need to generate their own insights.

So given a highly competitive marketplace, the need for increased penetration to grow a brand and limited cross selling opportunities, how can we analyse existing customer data so we can tell a start-up CEO or a corporate divisional director with any level of confidence who their new clients will be over the next 3, 12 or 48 months?

Start-Up

Early stage start-ups don’t have existing customer data and therefore we help them to analyse publicly available data, insight from research reports and initial data they have gathered to build out a model of their most probable client demographic. With this information to hand, we recommend a process of rapid prototyping. This means the concept can be tested with a relevant group of potential users and then (with appropriate regulatory approval) the reach can be extended to newly identified prospects and adapted according to their feedback. After further iterations, timely use of services such as ‘google surveys’ and solid WOM marketing techniques the product can begin to build its customer base by focusing on units of 10, then 100, then 1000.

Established Businesses

For established businesses the data analysis opportunities are more significant, especially if the company can combine data from the often present legacy silos. If both customer details and product usage data is available, then it is possible to combine the two elements to get to an answer.

Part 1: Customer Segments

Retail finance companies have an advantage because of the amount of customer data they are required to capture.  Services such as Experian’s FSS or CICI’s Acorn customer classification tool makes unlocking this data and mapping it against the third party classifications a relatively simple process and enables the business to confidently identify existing customer segments.

customer segments

Part II: Product Adoption

Remember we are trying to predict who the future clients will be, not who they already are and this is when product usage and customer behaviour analysis comes in. In retail finance customer purchase frequency is an issue, whether trading equities, investing in an ISA, setting up a SIPP, getting a loan or exchanging currencies frequency varies a lot. Analysing how customers use both established and new product to interact however frequently and their behaviour can give significant insight to a business.

We still think one of the best ways to illustrate this is by looking back at the adoption of, first the internet, and then mobile by retail finance customers. Remember when customers using the internet were in a minority? Understanding that group of customers and their behaviour early enabled a brand such as Hargreaves Lansdown to secure a competitive advantage and grow their market penetration. They now account for close to 35% of the DIY investing market. This opportunity for new providers to penetrate the market has now arisen again through mobile. Just look at the speed of growth of an app such as Revolut in the mobile payments / FX space compared to other finance brands.

product_adoption_2

Confident Strategic Decisions

The result of this analysis is clearly defined customer demographic segments, with subsets relating to product adoption and behaviour, for example early adopters of a new mobile service or product functions such as ‘social sign on’. These newly defined behavioural clusters can be used to enable a business to target clearly defined audiences with new product developments.

The point is that excessive and expensive analysis of customers from a loyalty and cross selling perspective is not the holy grail, but knowing who your future customers are likely to be based on existing customer subsets behaviour, enables company executives to make more confident strategic decisions and ultimately increase market penetration.

1Mundt, Dawes & Sharp 2006

 

One We Like: Revolut

November 16, 2015

By Consulting Group

At Black Swan Partners we are passionate about new Fintech products and we also like to give credit where credit is due. This week a storm has been brewing in the Black Swan office, and it goes by the name of Revolut; a mobile app attempting to save your hard-earned cash from the peril of exchange rate fees.

How Does It Work?

Revolut is an smartphone app and a prepaid travel MasterCard that automatically exchanges your currency at the point of sale (Sterling, Dollar or Euro) into over 84 other currencies at the interbank rates – this means zero fees for the user.

How Much Does It Cost?

Revolut generates revenue through MasterCard’s cut on every transaction, so all other stages of the customer lifecycle (depositing, withdrawing, exchanging) are free of charge. The closest alternatives recommended by MoneySavingExpert are WeSwap; a p2p exchange site that matches with users in other countries – but they charge inactivity fees and ATM fees, or Fairfx, which charges €1.50 ATM fees abroad and the card must be loaded with at least €60.

User Experience

We are so enthusiastic about this product, not just because of the price, but because the UI and UX are efficient, innovative and attractive. The account opening process is slick; I signed up via Facebook, verified my phone and ordered a Revolut card in a couple of minutes. To confirm my identity (for deposits of over £1,000) there was no scanning and sending off utility bills; instead, I took a photo of my driving license and then held up my phone whilst the app captured a picture of my face. I did have trouble making a first deposit so I used the instant messaging support to raise the issue which was swiftly sorted. After that I could instantly transfer funds via Whatsapp, sms and social media to other users. Revolut just stands out because every interaction between customer and product has been well thought through, and although there are still bugs to sort, it is not far off being an excellent all-round service.

revolut_all

The Future

Whether Revolut’s low-margin business model is sustainable remains to be seen; the Terms and Conditions only guarantee the current pricing structure for a users first year, which seems to acknowledge a degree of uncertainty. Colleagues at Black Swan have suggested the possibility of Revolut undertaking cross-selling in order to make the pricing more viable long-term. Whatever happens,  I will be taking my Revolut card abroad this Christmas to see if it’s all I’ve cracked it up to be. Stay tuned.

 

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Get Personal with Embrace, IBM and Opinium

October 27, 2015

By Consulting Group

On Friday 23rd October 2015, in collaboration with IBM and Opinium, communications agency Embrace hosted Get Personal, an event focused on the changing role of marketing in financial services. As a keynote speaker, Stuart Millson of Black Swan Partners presented on the issue of personalised communications versus personal recommendations in financial correspondence. Other presentations included the background to the user journey, the evolving digital landscape and how website personalisation can be implemented across websites.

Embrace

How has the customer journey changed?

As demonstrated by Laura Creamer of IBM, technological advancements have changed the way users interact with brands; online traffic and sales have increased, as has social engagement. The once-linear user story has taken a plot twist and mobiles have become the primary source for internet usage with 50-80% of the transaction process completed before speaking to the buyer. However there is a customer divide; 81% of companies say they have a holistic view of their customers whereas only 37% of consumers say their favorite vendor understands them. In order to fully understand their customers, firms need to compile individual data from all silos (email, social media, website clicks, purchase history) and build better customer profiles to which they can then cater. Paul Wreford-Brown of Embrace emphasised this, stating that it was imperative to give each visitor the most relevant, targeted experience possible. Rules based personalisation, which automatically adjusts a sites content based on the behaviour of a user, is just one of a number of ways to customise content.

How important is social media?

In addition to personalised content, marketing specialist Simon Ryan emphasised the importance of social media due to its ingrained nature in society; 54% of adults check social media before they go to sleep and 38% as soon as the wake up. The social media audience is already active online and waiting for insightful and timely content. The more timely you are to offer an opinion, the more you can command influence.

Although the financial services industry was initially slow to make use of social media, in 2014 88% of advisers used social media as an individual or for business with half using it for sourcing industry and general news. Simon touched upon a number of social media success stories including Neil Woodford who accumulated 17,000 followers in one year and M&G Bond Vigilantes who produce consistently high quality blog content.

But what about compliance?

The fear of non-compliance is often used in financial services to explain why innovations which are commonplace in other industries are not used in the sector. Stuart Millson outlined the golden rule for financial service marketers wishing to personalise their content to current and potential clients without giving a personal recommendation – do not mention a specific fund or other single investment product. If adhering to that, personalised communication can be used on websites, in email, tweets or posts or adverts on LinkedIn or Facebook. In addition, firms can also integrate social functionality into their own websites or apps to facilitate recommendations between customers. The FCA doesn’t want to regulate conversations between friends in the pub, and the same goes for conversations between friends online.

GEt Personal Stuart

A big thanks to Embrace, IBM and Opinium for an excellent event full of insightful and thought-provoking content!

I’m 32 with £15K to Invest

October 19, 2015

By Consulting Group

The brief for this blog was to imagine I was a 32 year old with £15k to invest, and write about where I would put it and why.  Given that, touch wood, my wife and I will complete on our first home purchase on Friday, the truthful answer is a leveraged property bet!  However, for the sake of a more interesting article, I will imagine a second pot of £15,000.  The first port of call would be to set £5k aside as a safety net – I now have a boiler and a roof to think about after all!

From next April, tax changes mean p2p lending might be an option, as the interest won’t require a tax return. Although interest rates for lending to individuals through companies like Ratesetter and Wellesley are lower than business loans through FundingCircle or Thin Cats, the process is easier and more secure; loans are aggregated so you are realistically not affected by an individual default, and these firms are much more focused on user experience. My personal preference, having used them before, would be Wellesley. However, despite all this, the reason why I would not use p2p lending for my safety net is that I might need to access it instantly. Even with early access functionality, instant availability is not guaranteed. For that reason I would use one of the high interest current accounts currently available, probably through Lloyds.

With a wedding, mortgage deposit and safety net behind me, I can think longer-term for the remaining £10k. The popular choice for this type of investment is a pension, and although I don’t currently pay higher-rate income tax, there’s a reasonable likelihood that I will in the future. There is no point in putting money into a pension now, tying it up until I’m 55, and receiving tax relief at 20%, when I can invest it now, retain access to it, then put it into a pension once my earnings have risen and get tax relief on it, plus the investment returns, at 40%.

I believe the best way to invest this money is through Bux; I can purchase non-leveraged CFDs, which receive dividends and pay no financing charges, in major indices from the UK, US and Europe, for 0.06%. Selling them incurs the same cost, and holding them costs absolutely nothing. I can buy and hold a portfolio with £2,500 in the FTSE 100, £1,000 each in the S&P 500 and the NASDAQ and £500 each in the French, German and Dutch main indices for £3.60.

BUX Combined

However, the ideal Bux customer would be a more active trader than described and, as a result, Bux has made a deliberate choice to gamify the trading process; friends I’ve spoken to are put off from investing by the interface and informal terminology.  Nonetheless, the app is attractive and easy to use and hopefully Bux and similar products can become the future of low-cost self-directed investment.

At the moment Bux only covers major stock markets, and I would like some exposure to small caps and emerging markets. This means I will also need an account with an execution only platform.  Hargreaves Lansdown not only gives me choice, they make it clear I have the choice. For these less developed markets I would consider actively managed funds as well as passive funds or ETFs, but I would like to have the option. I can visit the Hargreaves website without an account and see that I can buy small cap or emerging market ETFs from providers such as Vanguard or iShares. From other providers those ETFs are either not available, or there is no option to search for investments without opening an account. The Hargreaves site isn’t perfect, especially on mobile, and I’d rather not pay 0.45% for an ISA, but in the end I would, because it has what I need and makes it easy to find it..

Rapid Prototyping for Finance

October 12, 2015

By Consulting Group

Last week Dominic Crosthwaite from Black Swan Partners and Matthew Lenzi from our partners Hanno joined forces to lead a rapid prototyping workshop at Level 39 in Canary Wharf.  In attendance were the six finalists of the 3DS Fintech Challenge:Algodynamix, CheckRecipient, Passfort, Quarule, My Stock News and Percentile.  A brief round of introductions kicked off the workshop with each start-up explaining what they hoped to learn from the event and Matt outlined the basics of rapid prototyping.

What is Rapid Prototyping?

Rapid prototyping is the process of a designing and creating products over very short periods of time, measured in hours and days. In contrast to traditional development methods, it emphasises iterative design over extensive documentation and seeks to use innovative techniques such as real-time feedback and designing directly in a browser to speed up delivery.

Hanno see it as much a philosophy as a technical skill and Matt emphasised a number of core beliefs necessary to be successful:

  • Explore new ideas, learn through actions and get real time feedback. Hanno’s preference is using design thinking
  • Build communities on social media as co-creation is key – there is a group of people for everything and early adopters will be supportive

Identify Your Target Audience

A prerequisite of successful rapid prototyping is the identification of the target audience. Dominic explained its importance and how Black Swan Partners approach these challenges for clients. The obvious risk is that if you collaborate with the wrong users, then you will invalidate the benefits of rapid prototyping and could develop with the wrong end user in mind. This process of client identification includes:

  • Review of publicly available marketing reports and data sources including the FCA’s Customer Spotlight segmentation research
  • Paid for services such as Experian’s financial strategy segments
  • Where relevant, analysis of existing client activity data

The analysis of existing data and information rather than bespoke research can accelerate the learning around audience segments and enable the full benefits of rapid prototyping to be realised.

Uber from a Rapid Prototyping Perspective

Uber London was struggling to sign up drivers at the same rate as in the US and asked Hanno to create a website to attract and onboard drivers – in 2 weeks. The first step was to get an Uber account, use it to get to work every day and talk with the drivers. Writing a journal allowed Hanno to utilise the the driver’s feedback and through a combination of collaborative tools, Hanno co-created the site with both the Uber team and the drivers Uber was targeting. Through this process the cultural nuances between the US and the UK became apparent; the London drivers predominantly used mobiles instead of desktops, the majority highlighted English as their second language, wanted to be able to share the Uber opportunity with friends and classed driving as their full time job. Instead of lengthy and costly focus-groups, Hanno responded by creating a mobile first website written in clear and concise language that emphasised the flexibility of working hours and that could be easily shared.

We also took time to talk through another case study, Transcence, an excellent product that allows conversations to be transcribed onto smart phones in real-time, helping the hard of hearing engage in conversations. In one week, Hanno built and iterated through 10 prototypes and at the end of the sprint delivered several validated prototypes and insight into how to solve the next challenge. As well as the case studies, there was a lot of interest from the room in what tools are used in the process. Some of the key tools are listed below:

Tools Description
Google Docs Online document creation, storage and editing
Mural Online brainstorming, synthesis and collaboration
Skype Instant Messaging and video chat
Middleman Static websites
Bootstrap Responsive, mobile first projects
InVision Prototyping, collaboration and workflow platform
Balsamiq Wireframing platform
BugHerd Bug tracker and client feedback
Unsplash High resolution photos
Squarespace Website creation
Asana Work tracking
GitHub Software building

 

The work-shop then moved into an open discussion with all the participants discussing how rapid prototyping could apply to their start-ups both within a b2c and b2b context.

We received very positive feedback from participants, the sponsor Dassault Systems and their partner Deutsche Böurse. Everyone at Black Swan Partners and Hanno would like to wish the six finalists luck with the remainder of their accelerator programme!

One We Like: Citymapper

October 6, 2015

By Consulting Group

Why does this get a mention on a financial consultancy blog?  Having converted to an iPhone in January ’15 after 10+ years as a Blackberry die-hard I have had an amazing 10 months of new app experiences. Uber (leave for another day), Sonos, Spotify, Strava, WhatsApp etc are all good, but Citymapper stands out. Why?

With so much fintech competition, it can often be the detail that makes the difference and allows a new start up to compete with established brands. In the mapping area, Google so often wins in head to heads, but ultimately companies come along and challenge the status quo.

Citymapper does what it says. It knows your location in London, so all you need to do is put in your destination. So far so does Google maps, but this is where the comparison ends. Citymapper thinks for a while then gives you multiple options, with prices and times. In London these options include walking, Santander Cycles, buses, tubes, boats, trains, Uber and if inclined jetpack. It sounds simple, but lets look at a few areas:

Price Differential:

We like this because it ties in to one of our key service areas in retail finance – pricing. By giving clear indications of price options for example: walking – free, bus – £1.50, tube £2.30, boat £6, uber £11-£15 it immediately appeals to a broad set of clients that can all get specific value from it whether wanting to prioritise time over money or even health as it also includes calorie count.

City mapper 3 Citymapper 1 Citymapper 2

Referral and Detail:

I had happily used Google maps (even on the Blackberry), so why switch? Firstly, by being a quality product it was recommended to me (a key part of all start up retail fintech experiences). The simple ‘Get me home’, ‘Get me to work’ buttons shows they are dealing with real users and have thought about what we do every day of our lives… In terms of detail, if you are a tube user how often have you arrived at a station and then looked for the exit and found it to be the other end of a crowded platform? On the daily commute you know where to go, so why not on the other trips around London. Citymapper steps in here and tells you a. what end of the train to broad and b. when you exit which exit to use. If you are in London it gives you a Rain Safe route, if in Singapore a ‘Haze free route’. Simple, but smart.

Learning:

If the service you are providing gives you and others an advantage, then individuals may be willing to help further improve it. In Citymapper there is a neat function that allows you to ‘improve data’. e.g. suggest front of the train, not the middle, use a different exit etc. Using its own customers to enhance the product through feedback. Again something that is a challenge for retail finance brands in a regulated environment, but something that should be embraced.

Usage:

It has become an invaluable tool for the Black Swan Partners team as we plan our days running around town meeting clients and prospects seeing friends, going to sporting events, saving minutes every day and being such a good user experience that we even write this blog about it.

Last Friday, Gina Miller, co-founder of SCM Direct, delivered some strongly critical comments in an FT Adviser article regarding Nutmeg and the risk profiling it performs on clients as part of its suitability assessment. Both firms advocate discretionary allocation of portfolios constructed from ETFs with low, transparent fees, but currently Nutmeg is receiving more publicity and plaudits, despite SCM Direct actually having a lower headline fee.

We’ll now delve into some detail of Nutmeg’s account opening process that even FT Adviser opted to steer clear of, so bear with us, but the starting point for investing with Nutmeg is to choose your amount to invest, an optional timeframe and your preferred portfolio, with a risk level from 1 to 10. At this point you get some information about the portfolio and some projections of its potential growth – so far, only generic, non-regulated advice has been offered.

Only when you have confirmed your portfolio choice, entirely self-directed, are you then asked to complete a questionnaire to determine your attitude to risk – the decision tree Gina Miller refers to in the FT article – and once you’ve done so, you might see something like this, including the enlarged comment on your portfolio choice:

Nutmeg Suitability

It is easy to pick holes in Nutmeg’s questionnaire – it is overly long, and frames stock market fluctuations in a very negative light which could unnecessarily put off inexperienced investors. By comparison, the comment that you see once you’ve completed it, showing the portfolio, the usual risk level chosen by people with the same timeframe and attitude to risk as you, appears sensible.

The use of ‘preferred risk level’ is important – it is a clear attempt by Nutmeg to pass this off as being not related to a specific investment product, and so as non-regulated generic advice. However given that Nutmeg has 10 risk-adjusted portfolios, with your portfolio determined solely by your chosen risk level this is, at best, sailing very close to the advisory wind. Given the FCA, in the guidance on retail investment advice it released in January 2015, explicitly states that a comment such as ‘people like you buy this product’ is investment advice, Nutmeg must be very confident in the dialogue with the FCA that its CEO Nick Hungerford alluded to in the article.

Miller’s complaint is understandable, but when you remember the FCA’s mission to help improve customer outcomes, you can see why it is willing to allow Nutmeg’s approach. An operator cannot adequately understand its client’s approach to risk without carrying out a risk questionnaire. Yet having performed the suitability assessment and found, as in the case highlighted above, that the client has chosen a totally unsuitable portfolio it can’t stay silent either. The advice, whether it is generic or specific investment advice, is clearly helping to improve the customer outcome.

On the face of it, it appears incompatible for firms offering such generic investment management services to carry out a suitability assessment including a risk assessment, or provide a suitability report, without at the same time offering investment advice. Certainly SCM thinks so – it doesn’t offer a risk assessment or a suitability report – and it’s questionable why Nutmeg wishes to do so.

Getting rid of suitability assessments would stop people being put off by Nutmeg’s questionnaire. Instead Nutmeg, and SCM if it wished to, could provide more generic, non-regulated advice elsewhere on its site, away from the investment choice. By helping customers understand their attitude to risk elsewhere on the site operators can help them make better decisions and achieve even better outcomes, without blurring the lines regarding regulated investment advice.

 

I’m 26 with £15k to Invest..

September 21, 2015

By Consulting Group

As a young professional in London, my background, goals and time frame are fairly common; I have a basic knowledge of the financial markets, but not enough to beat it consistently, and I place a high priority on saving enough for a house deposit over the next 5-10 years.  But investing is no longer ringing an advisor to pay exorbitant fees; it is low cost DIY services on a mobile or tablet.  I am one of the tech-driven Millennials, so where do I invest my first £15k?

ETFs

I would invest in Exchange-Traded Funds (ETFs) using services such as Nutmeg and ETFMatic.  ETFs are the popular, low-cost way of gaining exposure to the financial markets and services like the above have been developed purely around the use of ETFs.  I don’t have to do anything but deposit my money and periodically check to see how my investments are doing!

Nutmeg is a simple, attractive and transparent service that offers ISA and pension accounts.  I choose my investment amount,  desired risk level for their portfolio (ranked from 1-10) and an optional timeframe, and the portfolio is then fully managed by Nutmeg’s investment team.   Nutmeg is good value, accessible to most (min £1,000 investment) and has an excellent website, but it suffers from lack of an app and the mobile site is very limited.

An alternative approach to ETFs is ETFMatic which, although yet to fully launch, will be the UK’s first ‘Robo-advisor’ that uses algorithms to allocate and re-balance portfolios.  ETFMatic will offer 125 strategic portfolios based on behavioural questions such as preference for capital preservation or profit maximisation.  I look forward to seeing how it competes with the likes of Nutmeg and the incumbents that are rumoured to be developing robo-products.

 Funds

To retain a degree of control of my investments I would invest in funds of my own choice, but there are over 2,500 to choose from and trawling through rating agencies such as MorningStar and TrustNet is daunting.  The Hargreaves Lansdown (@HLInvest) ‘Wealth 150’ however, provides a clear overview of the history, sector and cost of HL’s favourite funds.  Whilst the list is very informative, it isn’t particularly mobile friendly!  Alternatively FundCalibre is an online research centre and fund ratings agency which awards an elite rating to the best performing funds.  Information is presented in a mobile-responsive, digestible way and I can create and buy portfolios through its sister company, Chelsea Financial Services.  In general there are a number of fund comparison tools available to use, but few with user experience in mind.  Purchasing funds can be completed through a variety of online platforms, each offering different levels of service and fees.  Choosing a provider is laborious butBoring Money has compiled an excellent and comprehensive guide that compares providers on usability, service, research, cost, security and choice.

Boring money

Stocks

Finally, to develop my knowledge of the markets, I would pick a number of equities to invest in.   For help choosing the right stocks Simply Wall St has changed the way users can view financial analysis. Currently available on both desktop and mobile, Simply Wall St rates a company on value, expected performance, past performance, financial health and current income.  Its presentation of data in highly visual formats makes a welcome change from the traditional dreary fact sheet.

Simply Wall St

The way people invest is changing and, as demonstrated above, there are a number of tools available to help consumers make better investment decisions, but coming from a company that specialises in product development, it is surprising to see so many website lacking basic mobile functionality.  Overall, I have tried to combine cost, diversification and expertise with a little leftover to aid my own development.

Stocks

Finally, to develop my knowledge of the markets, I would pick a number of equities to invest in.   For help choosing the right stocks Simply Wall St has changed the way users can view financial analysis. Currently available on both desktop and mobile, Simply Wall St rates a company on value, expected performance, past performance, financial health and current income.  Its presentation of data in highly visual formats makes a welcome change from the traditional dreary fact sheet.

The way people invest is changing and, as demonstrated above, there are a number of tools available to help consumers make better investment decisions, but coming from a company that specialises in product development, it is surprising to see so many website lacking basic mobile functionality.  Overall, I have tried to combine cost, diversification and expertise with a little leftover to aid my own development.

 

Being well brought-up and English, we at Black Swan Partners are reticent to blow our own trumpet. However, as our clients will confirm, we always call things as we see them, and last week’s FT advisor article by Peter Walker on ‘robo-advice’ assets in the US confirms what we wrote in section 3 of last year’s white paper on social investing . The biggest beneficiaries from changes in the investment management industry – be it robo-portfolios, low-cost investment management or social investing – will not be the disruptors themselves, but the first big, established brands able to replicate those innovations.

Leaving aside the fact that Vanguard’s Personal Advisor Service is, like Nutmeg in the UK, not in the least bit robotic, Walker’s article highlights that it attracted $11bn AUM between its launch in beta in 2013 and the end of June 2015, of which $4bn came since the full launch at the start of May 2015. Charles Schwab’s robo-advisor product (one that is actually robotic) attracted £3bn from 39,000 clients in its first 6 months. Both of these comfortably outpace the growth of Betterment and Wealthfront, operating since 2010 and 2011 respectively, which are each thought to have $2.5bn under management each.[1] [2]

Vanguard

The reason why the old established names have attracted customers, and assets, so much faster than the original disruptors is that, when it comes to people’s life savings, their biggest priority is rarely how innovative a company is. It is rarely even how expensive it is. Instead, it is trust in the brand – have they heard of it, how long has it been around and what do their friends and families think of it?

That’s why, though we like Nutmeg, its easy to use platform and the way it has made professional investment management accessible to all, as it stands the biggest beneficiary of its approach is still likely to be whichever existing player replicates its service (or acquires it). Similarly, the most successful robo-advisor in the UK will not be a new entrant, but whichever operator gets its act together and launches one first.

The Nutmeg approach, with a human making the investment decisions, is best suited to a firm which issues its own passive funds or ETFs as Vanguard does, which can keep the cost of advice low and benefit from increased capital inflows – Vanguard charges 30 bps for its personal advisor service, as opposed to Nutmeg’s sliding scale from 90 bps down to 30 bps for those with £500k or more. (Vanguard’s service is only available for portfolios bigger than $50k). Fidelity is an obvious candidate in the UK, but Aviva, with its online platform and index tracker funds, could benefit in the same way.

Established, trusted operators who don’t issue their own collective investments are better off pursuing the robo-investing model. Hargreaves Lansdown is of course a candidate if it introduces lower cost options to its Portfolio+ service, but new investors, the type who benefit most from the low-cost, passive and easy investment model offered by Wealthfront and in particular Betterment, often prefer to begin investing with banks. Barclays Stockbrokers then, or Halifax Sharedealing, are perhaps best placed to benefit from robo-advising in the UK.


 

[1] http://techcrunch.com/2015/07/29/betterment-tops-100000-customers-and-2-5b-under-management/

[2] http://firstrate.com/blog/wealthfront-is-no-charles-schwab-yet/

The Perfect Storm

The current regulations around retail investment advice can be improved for everyone – government, customers and operators all have a clear incentive for change. The Government has a significant financial incentive to ensure people are better advised, prepared and secure for their retirement. Retail brokers, banks and advisers need to see a reduction in the regulatory burden and associated risks of advising customers and retail customers need an alternative to the current offerings. The last time such a perfect storm occurred was in late 2012, when the Government and the FCA came together with the crowdfunding industry to deliver an outcome that was favourable for everyone. Can the same thing happen again?

Current Situation

There are a lot of start-up ‘fintech’ companies looking to address the retail investing sector, such as Investyourway, Nutmeg and Swanest. They all have differing approaches, but in general these are products that people can choose once they know what they should be doing. They are not addressing the ‘Advice Gap’, though a provider such as Moneyontoast does offer both online advice and a resulting portfolio.

The current UK regulatory environment is not conducive to new entrants offering innovative approaches to guidance or advice but does suit established players applying for additional or variations of permission.  We welcome the fact that execution only broker TD Direct recently applied for and received a new FCA permission to provide ‘specific, non-personal online, advice’ on investments. This advice is not deemed to be a personal recommendation and the lower regulatory obligations make it a more viable service for certain operators to offer.

The Role of Social

What we like most about the HM Treasury announcement is the statement ‘consider ways to encourage people to seek financial advice’.  This means they clearly have to be thinking beyond the existing unregulated ‘Money Advice Service’ provided by the Government. One such way is to consider the provision of tools that maximise the benefit of using friends, family and colleagues for help when making financial decisions. We call it social investing and believe that it can be used to bridge not only the ‘advice gap’, but also the ‘confidence gap’ which exists and stops customers making the move into retail investing.  We have looked at this in more detail in our earlier white paper “Social Investing – Opportunity to Address the Confidence Gap”.

confidence gap

What’s in it for the Government?

Take some risks now to create the optimum regulatory and business environment to address this significant challenge. Get it right and it will help ensure operators innovate and develop the right solutions and millions of people could be better off in retirement. Get it wrong and the burden on the state of millions of middle income individuals not properly prepared for retirement will be far more significant.

How Finance Firms Can Get a Handle On Twitter Handles

August 3, 2015

By Consulting Group

Black Swan Partner’s Investment Week article highlighted the slowness of financial services to implement meaningful twitter strategies, and to use the platform as an effective means of customer engagement.  But, as demonstrated by a number of fund managers, insurance brokers and share dealing platforms, Twitter presents a significant opportunity for these companies and usage varies from firm to firm.

Personal Twitter Handles

CEO of Aberdeen Asset management Martin Gilbert (@MartinGilbert83), and Seven Investment Management co-founder Justin Urquhart Stewart, (@ustewart) use personal twitter handles to tweet a mixture of business content alongside private commentary.  Both accounts are an interesting follow and present a good balance between personal touch and corporate messaging.  Martin Gilbert is often re-tweeted by @AberdeenAssetUK and @7IM_Adviser regularly inform followers of Justin’s business updates as well as tagging his personal account.

Whilst across the industry the number of company Twitter handles is increasing, firms still appear uneasy at the prospect of providing employees with their own business-linked accounts.  This is not unique to the financial services; employees in a variety of industries tweet in a professional capacity from personal accounts.  In Black Swan Partners experience, fear of non-compliance is the main driving factor behind firms preferring individuals not to operate business-linked accounts.

Corporate Twitter Handles

AXA Wealth has taken steps to provide a number of its employees with their own personalised, but AXA branded accounts, from which they can post predominantly work related content.  From a marketing perspective this makes the brand more personable and promotes the context of interacting with individuals on Twitter rather than a corporate.

For employees that operate in public facing roles, liaising with magazines, television and the radio, personalised corporate accounts are an effective way of leveraging the personal aspect of Twitter, but maintaining the corporate brand.  These accounts can be run by the individual or they can be operated by the marketing team via tools such as Hootsuite, CrowdControlUK or OKtopost, which allow access to multiple accounts.   If an employee leaves the company, the twitter handle can be changed and the follower numbers retained.

AXA

 Best Approach

Corporates need to balance a range of issues, including compliance, messaging and existing media presence of individuals before determining the right strategy. We believe the most important point is to have the conversation and proactively decide what to do rather than let social legacy dictate how your brand moves forward across multiple channels.

 

Betterment was the first company to launch a ‘robo-investing’ product, where a client’s portfolio is automatically managed based on an algorithm. Although it has been overtaken by Wealthfront in terms of assets under management, it still has more customers than any other robo-investing provider.

Black Swan Partners has written before that, despite much excited talk in the industry media about the impact which companies such as Nutmeg or Money on Toast may have, there is yet to be any UK equivalent to Betterment, Wealthfront and other US providers where portfolio management is entirely automated. This is presumably a deliberate decision by Nutmeg – having a human Chief Investment Officer in charge of its portfolios might mean it has to charge significantly more than the US firms, but gives it more flexibility.

The human element enabled it to sell UK equities when it appeared Scotland might vote for independence last year. However, even if Nutmeg continues to shy away from robo-investment management, it will be interesting to see if it tries to replicate Betterment’s latest innovation – a robo-savings plan. The product, called SmartDeposit, links with the customer’s current account (checking account in Betterment’s US terminology) and each week checks to see whether there is any excess cash above the ‘Checking Account Ceiling’ set by the client – if so, it automatically invests it into his/her Betterment account, up to the ‘Maximum Deposit Amount’, also set by the client.

From Betterment’s point of view it’s clearly beneficial for as much of its clients’ assets to be invested with it as possible, though SmartDeposit should also be very beneficial for its clients. Most people hold too much money in cash, and Betterment quotes a UBS survey which found that people with the longest investment horizons, those aged 21-36, who should generally be investing in high-growth portfolios, hold the highest proportion of their wealth in cash, more than 50%[1]. The difference between millenial and non-millenial investors is shown below.

Asset_Allocation

 

SmartDeposit should help these customers by taking any decision about how much a client should save each month out of their hands, and automatically investing the appropriate amount for the client at that time, depending on their current spending. Clients of Nutmeg, or for that matter any UK investment platform, could benefit in the same way.

The question is will clients want to use SmartDeposit? Giving a company access to your current account to take as much money as it deems fit seems like a big step, even for one that a client clearly trusts to look after its money. Control over your own money is fundamental to most people, and although SmartDeposit has a number of features built into it so that clients retain control, including the option to skip any SmartDeposit which comes up, this may be too big a barrier. On top of this, regardless of the potential returns they miss out on, many people want the reassurance of a large cash sum available to cover any unexpected expenses. It will be fascinating to see what take up Betterment gets for SmartDeposit, and even more fascinating to see if robo-savings makes it to the UK before robo-investing.


 

[1]http://www.ubs.com/content/dam/WealthManagementAmericas/documents/investor-watch-1Q2014-report.pdf

Bitcoin – What Is It And Where Is It Going?

July 13, 2015

By Consulting Group

Since the invention of Bitcoin in 2008, fintech innovators have been eager to follow the development of cryptocurrencies and their acceptance alongside traditional monetary systems.  Bitcoin has returned to the news most recently after domestic capital controls in Greece led to many citizens turning to the digital currency.  But what actually is Bitcoin and why are people using it?

What is Bitcoin?

Without delving too deep into its intricacies, Bitcoin is a decentralised, digital currency that is transferred from person to person without the need of an intermediary who takes a cut.  Bitcoins don’t represent anything in the physical world and the only value attached to them is the willingness of people to trade a good or service for a higher number of Bitcoins next to their account, as well as the belief that other people will do the same.  Bitcoins are created through a process of ‘mining’ whereby ‘miners’ solve complex mathematical calculations around the World.

Why Would You Use It?

An enormous amount of confidence has been lost in the traditional financial systems since the crisis of 2008 and this has been further exacerbated by Greece’s drawn-out negotiations and the Cyprus bailout in 2013.  Bitcoin is attractive for a number of reasons:

Cheap and fast – It is possible to send money anywhere in the Word at any time for either no or very low fees

De-centralised – There is no central bank or authority which means the system can’t be manipulated by persons, organizations or governments

Anonymous –  Personal details are not attached to a payment which keeps them safe from identity theft

Transparent – All transactions can be viewed in the public block chain


But Bitcoin’s life has not been all plain sailing…


Teething Problems
– Since its creation, Bitcoin has had a fairly chequered history including information leaks from exchanges, software incompatibility, and the currency being used to fund illegal activities on the Silk Road

Protection – Bitcoin has no buyer protection, once the money has gone it’s gone.  If a user loses their private key, it is effectively impossible to recover the lost coins

Volatile – Valuation has fluctuated massively since its creation.  The currency lost more than 90 percent of its value between June and October 2011.  This is partly due to its finite nature (only 21 million coins will be mined, running out in 2040) and the relative lack of acceptance by retailers.

bitcoin-price

What is the future of Bitcoin?

Bitcoin’s price should settle down as more retailers start accepting it as a method of payment; currently its valuation jumps around with events that affect digital currencies.  Just this morning it took a hit after the announcement of a Greek deal. However with no central authority permissionless innovation allows developers to make the currency more secure and accessible.  Its popularity is certainly on the rise as demonstrated by companies such as Microsoft, Dell and CeX now accepting it, and big institutions such as the Bank of England stating that it could have “far-reaching implications.”  Whilst the masses may initially struggle to understand a currency with no physical state, as I did, write off Bitcoin at your peril; an early reviewer of the iPhone said “Apple should pull the plug on the iPhone.  I’d advise people to cover their eyes.  You are not going to like what you’ll see.”  Bitcoin sceptics could find themselves in a similar position.

That being said, it is still unclear exactly what the future purpose of Bitcoin will be. While to those Greeks currently treating it as a reserve currency it no doubt appears a bastion of stability compared with a possible return to the Drachma, the reality is it remains incredibly volatile.  This is as exacerbated by the fact that other crypto-currencies are being developed all the time (more than 3,000 at present, with the biggest being Stellar, Globe and Litecoin).  At some point one is almost certain to be so much more user-friendly than Bitcoin that it takes its place as the crypto-currency of choice, which could lead to the value of Bitcoin collapsing to nothing. This risk is always likely to be present unless it becomes almost universally adopted as a reserve currency.

However, were it to actually become a true reserve currency, replacing national currencies, then many more countries would find themselves in the same position as Greece, uncompetitive, unable to pay debts and unable to rectify the situation through devaluation or printing money. The future of Bitcoin is potentially very bright, but who knows what that future may be?

 

So – budget day, first day of the Ashes, Wimbledon Quarter-Finals… This blog isn’t about any of those, which for a firm targeting the UK personal finance industry screams displacement activity, especially with the boss on holiday.

However, it is timely, as overnight the leading robo-advisors in the US, Wealthfront and Betterment have gone to war (whether or not they were actually inspired by Terminator Genisys is unconfirmed) – and Wealthfront started it.

Along with reducing their minimum investment from $5000 to $500 (undeniably a good thing, especially as Wealthfront doesn’t charge any fees on the first $10k under management), its CEO, Adam Nash, published a blog directly attacking Betterment’s pricing, and accusing it of taking advantage of its poorest customers. It’s the latest in a series of blogs from Wealthfront attacking its competition, following pieces criticising Charles Schwab’s robo-investing product and a more general piece accusing its competition of failing to innovate as successfully as it does. I dabble a bit in politics in my spare time, and try to work on the principle that any direct attack on an opponent should be absolutely on the money – and unfortunately this one misses the mark.

For those with less than $10,000 under management, Betterment offers a ‘builder’ product, with a charge of 0.35% for those who have a direct debit set-up contributing at least $100 a month. Those without the direct debit are charged a flat fee of $3 per month, and it is this charge at which Wealthfront has taken aim. However, as Betterment makes clear in its rebuttal, it doesn’t want to make this charge to customers, and communicates extensively with those who pay it encouraging them to switch to monthly contributions. It is used partly as a mechanism to nudge those with low levels of assets to make regular investments, which is particularly positive behaviour for newer investors. It is one of several features of Betterment’s product which make it especially attractive for new and inexperienced investors.

The starting point of Betterment is to enter your age and income, and to select an investment goal – for example, rainy-day or retirement saving.

betterment

A suggested portfolio, such as the one above, is then created, which the customer can either adjust manually or go ahead and invest in – if manual changes to the allocation mean the expected returns are no longer enough to get to the customer’s goal, the customer is notified. While these features would need to be adapted in the UK in order to avoid being seen by the FCA as advice (a subject for another blog), they are exactly the kind of support a new, inexperienced investor seeks to get the reassurance they are investing in the right things. It is because of this user experience that Betterment has had so much success in attracting smaller investors, with 3 times as many customers as Wealthfront (albeit with a much lower average account size).

Wealthfront is a hugely impressive company, brilliantly innovative with a great product. However a big part of its success so far has been its ability to attract large investments from Silicon Valley employees, which has contributed to its phenomenal growth in AUM. Reducing its minimum investment from $5,000 to $500 gives it a chance to attract more smaller investors, and by not charging a fee below $10,000 it offers those investors a phenomenal deal. However, new and inexperienced investors want more than just low-cost services. If Wealthfront is going to continue preaching from its pulpit, it needs to get its facts straight first.

 

 

Tracker funds and passively managed ETFs are generally considered to be the cheapest and most effective way to gain exposure to the stock market. If only seeking access to UK equities, this is probably just about the case – with a Fidelity UK index tracker costing 0.09% a year, or £5.85 on a £6,500 investment.

However, for those wanting a bit more diversification, what’s the best way to invest in, for example, the NASDAQ index? The iShares NASDAQ ETF charges 33 basis points per year, equivalent to £21.45 per year, plus trade costs. However, NASDAQ 100 Futures trade with CFD (contract for difference) providers such as City Index and IG at a 4 point spread. An investor can purchase a future at £1.50 a point with a 6 month expiry date, and pay a roll cost of half the spread every 6 months, meaning total charges of just £6 a year, with the cost of trading effectively £3 to purchase and £3 to sell.

With such low costs, it’s somewhat surprising that CFDs maintain a reputation as a tool for speculators not to be touched by cautious investors. However, there is a chance that this will change following the entrance into the market of companies such as InvestYourWay and Bux. Both of these use CFDs to provide low cost, flexible trading and investing, but without the leverage that characterises most CFD providers.

The services they offer differ slightly:

InvestYourWay produces tailored diversified funds according to timescale and desired risk profile, using CFDs in indices and ETFs from across Europe, Asia and North America. Investors can then adapt those funds further, by adding exposure to specific sectors or commodities. For this tailored service, investors pay a 1% annual management fee.

Investyourway (2)

Bux is different, targeted at this time more towards traders than investors, but like InvestYourWay using the low-cost trading afforded by CFDs to offer a very low minimum investment along with restricted levels of leverage.

bux

So will low or non-leveraged CFDs provide the route catalyst to encourage new and inexperienced investors to access the stock market at ultra low-cost? Hopefully, but there are significant barriers to overcome first.

  • Regulation – At present, CFDs are regulated as complex products under MiFID, even though a client’s exposure is no different whether they own a FTSE 100 tracker fund or a non-leveraged FTSE 100 CFD. This means providers need to ensure the product is appropriate for its clients, hampering the user experience and increasing the information that the provider must collect and store.
  • Intangible –  There is no physical instrument for the client to hold. This has two impacts. First, this means that beyond the £50,000 of assets covered by the Financial Services Compensation Scheme, investors are completely reliant on the provider to pay them the returns they earn – their investment is not transferable.

InvestYourWay and Bux have tried to mitigate this by using much more established operators, IG and Ayondo respectively, to provide the CFDs. However, it might prove to be a barrier to persuading people to invest more than £50,000. It might also prove an important psychological barrier for inexperienced investors. Many people, including my wife, are put off investing because they don’t understand how it works. When I asked this ‘focus-group of one’, she said that whilst she would be reluctant to invest in a share or a fund, the fact that you were physically buying a product was somewhat reassuring, and a CFD offers none of that reassurance.

The use of non-leveraged CFDs clearly has huge potential, and personally I think InvestYourWay and Bux are great products. However, that alone won’t make them successful, and they have a long way to go if a critical mass of investors will embrace them as the way to invest for the future.

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