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.
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!
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.
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?
July 8, 2015
|By Consulting Group|
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.
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.
July 7, 2015
|By Consulting Group|
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.
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.
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.