September 22, 2015
|By Consulting Group|
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:
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.