Research by IRN Consultants explains most UK robo-advisers such as Nutmeg are likely to be unprofitable for years to come. Nutmeg’s accounts for 2014 accounts recorded sales of £632,000 compared with operating cost of £5.3m ($6.9m, €6.1m).
The findings are similar to a report published by investment management firm SCM Direct last month which estimates that the average UK robo-advisers is making a loss of £162.60 for each new customer in the first year, making just £17.50 per year per account in subsequent years.
As a result, UK robo-advisers are ‘wired’ to lose money and most will go bust before acquiring the sizeable assets under management needed to survive, warned SCM at the time.
IRN said based on those figures, robo-advisers would have to service clients for the best part of the decade even break even.
Five years behind US
Despite the growth in automated services in the UK, the industry only accounts for around £150m of assets under management – just 0.0125% – of the £1.2trn which the Financial Conduct Authority (FCA) estimates is invested by retail and private clients.
The figure represents a miniscule proportion of the £132bn which the report estimates is invested in direct-to-consumer fund platforms – just 0.113%.
IRN said that Britain’s use of robo-advice “lags well behind that of the US by at least five years”, with major automated investment platforms like Wealthfront and online investment advisers like Betterment leading the charge.
“Some argue that robo-advice is now the third largest type of advice for the institutional and venture capital sectors in the US,” read the report, entitled Robo-finance agents in the financial services markets.
The report found that robo-advisers entered the market using three business models; data, data aggregation and analysis and client interaction.
This involved using data supplied by consumers combined with data from other sources (e.g. market returns) to build an algorithm-driven automated portfolio management advice service to consumers, which allows people to manage their wealth via online services or in addition to human advisers.
IRN added it was difficult to establish just how profitable robo-advice is in the UK as some companies ae still so small that they don’t have to disclose accounts.
“Robo-finance agents represent a tiny share of the addressable market, with most companies in the UK either not yet filing accounts because of their youthfulness, using small company exemptions not to show turnover in their accounts or generating only small revenues,” said the report.