Heavy lifting still to do for robo-advisers

Nutmeg, the online investment manager (or “robo-adviser”), has tripled its turnover since 2014, but it is yet to turn a profit. Sarah Moore reports.

Nutmeg, the online investment manager (or "robo-adviser"), last week reported a pre-tax loss of £9m in 2015, up from £5.3m in the previous year. Although the company has tripled its turnover since 2014 (from £635,000 to £1.7m in 2015), it is yet to turn a profit. The firm said that the rising losses were due to costs incurred by increasing investment in its technology infrastructure, as well as its application to hold clients' funds itself, rather than paying a third party to act as custodian.

"As is natural for an early-stage company, we have been investing heavily to establish ourselves and our brand, in line with an ambitious business plan," said Martin Stead, Nutmeg's chief executive, who replaced founder Nick Hungerford in May.

Customer numbers have grown by more than 50% over the past year, assets under management have more than doubled in the same period, and assets per client are up by 35%, according to the financial statements. Nutmeg has never publicly disclosed how many active customers it has signed up or its assets under management, but the Evening Standard recently reported that the firm was approaching £500m in assets. That would leave it a considerable way from achieving profitability, given its comparatively low potential margins, David McCann of Numis Securities told Citywire Wealth Manager earlier this year.

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"The scale you need to make the business work when you have those fee margins is high. For it to be viable you need around £5bn in assets, and £10bn to be economic." Indeed, most UK robo-advisers "will go bust before acquiring the sizeable assets under management to ensure their sustainability", according to research by SCM Direct, a wealth manager. SCM claims that the average UK robo-adviser spends at least £180 on acquiring each new customer, but receives revenue of just £147.50 per customer per year.

Hence, industry analysts sounded less impressed than Nutmeg's management with its recent progress. "We've long thought that the robo-advice market needed a reality check," Michael Barrett of The Lang Cat, a consultancy, told Money Marketing. "There is an awful lot of hype around robo and fintech, but despite the promise, the adoption of these services is painfully slow and, worse still, appears to be having little if any impact on the larger existing firms such as Hargreaves Lansdown."

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.