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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!

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.

 

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.

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?

 

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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