July 17, 2015
|By Consulting Group|
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%. The difference between millenial and non-millenial investors is shown below.
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.