At the robo-investing Europe 2017 conference in London, two strong consensus views were held by industry experts. Firstly, that European clients, particularly in southern Europe, are still encumbered by exceptionally high investment fees. Secondly, that a direct-to-consumer robo-advisor simply could not exist as incumbent firms would eventually enter and completely take over the market. The second argument is often based on the assumptions that profitable unit economics could not be reached given that the assets under management (AUM) levels required to justify customer acquisition costs (CACs) are simply too large for startups. We strongly agree with the first conclusion and respectfully disagree with the second.
We believe regulation, often not discussed, is another industry trend that affects this debate. Increased regulation has meant investment firms and banks have often looked to standardise their offerings as much as possible in order to offer scalable solutions that they can effectively monitor. In our view, portfolios (by both incumbents and robo-advisors) are deemed “personalised” and “bespoke” when customers are given at most five risk buckets to invest in. Technology however has the incredible ability to alter fixed costs and drive down variable costs to zero over the long term. New firms, without any legacy systems, processes or technical and strategy debt, can therefore use it to build offerings that serve clients in an entirely new way. New digital strategies, not based on the traditional models, could mean clients can also be reached at a far greater scale than ever before.
New firms can offer truly bespoke and personalised investment offerings at a fraction of the costs.
We believe that this means one can offer truly bespoke and personalised investment offerings at a fraction of the costs (both fixed, variable and CAC) compared to traditional services. We believe you can reach a very large currently underserved market. At ETFmatic we built our technology stack from the ground up in an attempt to address this problem. This has allowed us to offer three very distinct services and hundreds of different portfolios for our clients. Our starter portfolios offer straight-forward and simple to select Conservative, Balanced and Aggressive portfolios. Investment plans allow customers to tailor their exposure to risk as well as how dynamically their asset allocation should adjust to market movements. Lastly, our newly launched custom portfolios allow our clients to build any asset allocation that meets their needs, whilst we select their ETFs and manage their portfolio for them. On top of this we believe we are also the only robo-advisor to offer all our portfolios in three different currencies (GBP, USD and EURs) and zero investment management fees for portfolios managed for children under the age of 18.
The product however only answers supply, more importantly perhaps, is the question of demand. Are investors in Europe willing to switch from their current providers and is the market large enough to achieve critical mass? We strongly believe that investors in Europe demand an investment solution that is as diverse and dynamic as they are. We believe that in order to truly serve clients across the entire Europe you need to be able to meet all of their needs. Our data of 32 European countries certainly proves this.
Our portfolios show that in a large and sophisticated market like the UK there is an equal split between starter and investment plan portfolios, pointing to an equal demand for simplicity as well as more complex and tailored investment solutions. Our clients in Denmark on the other hand fall on the exact opposite end of the scale in their investment needs when compared to those in France, Cyprus, Lithuania and Slovenia. Diverse countries like Greece, Austria and Italy are the largest users of our custom portfolios. How would a standard five risk model approach serve all of these markets?
Note: We passported to 15 additional countries in January 2017, data for these geographies is limited and observations should be considered preliminary
Interestingly we see the largest average AUM figures are not from the UK, France or Germany but from countries like Belgium, Ireland and Hungary. Markets that we believe are very much underserved and in need of better investment offerings.
There is no doubt that investors across Europe are increasingly demanding lower costs investment solutions. We believe that to truly meet their needs however, at a large scale, you have to be able to offer an investment service that is as dynamic and diverse as they are. As technology firm, that is exactly what we aim to do.