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February 17, 2014updated 05 Jun 2017 11:21am

Exclusive: Nutmeg shakes up next-gen wealth management

While online wealth management is driven by the demand from newly minted millionaires in the Silicon Valley, Nick Hungerford sits down with Private Banker International to discuss how he is pioneering the trend in the UK as the first online discretionary manager. By Caroline Ng.

By Caroline Ng

While online wealth management is driven by the demand from newly minted millionaires in the Silicon Valley, Nick Hungerford sits down with Private Banker International to discuss how he is pioneering the trend in the UK as the first online discretionary manager. By Caroline Ng.

A sweeping digital revolution has dramatically transformed the face of the financial services industry in recent years, but private banks have largely left unscathed due to their slow reaction to new technological trends.

However, the decades-old wealth management industry has now become one of the last industries to fall into the hands of new technology.

For the first time, the concept of managing ‘old money’ is being challenged by new upstarts who are using technology to stir a storm in traditional wealth management firms by targeting the nouveau riche.

In the UK, Nick Hungerford, former alumni of Barclays Wealth and Brewin Dolphin, has launched the first online discretionary manager in 2012. The idea behind Nutmeg is to remove the private banker and make wealth management widely accessible to everyone.

"The real premise behind it is that ‘investing is not a physical good’ but a theory. So, just because you have $10m and I have got a $100,000 doesn’t mean I shouldn’t have access to investment," says Hungerford.

A techno-entrepreneur at heart, the 33-year old former stockbroker left the UK finance industry during the credit crunch to pursue an MBA at Stanford University. So inspired by the culture at Silicon Valley that he decided to fuse technology and finance when he returned for a new group traditionally ignored by wealth managers – the young and educated professionals who may not have the net worth required to be a private banking client yet. In fact, it is this pool of tomorrow’s wealth accumulators that Nutmeg is primarily courting.

"We want private banks to wake up one day and realize that Nutmeg has all our clients. There are no more clients to get," says Hungerford. "That’s what we really want."

Next-gen digital shift

The timely digital shift is also tapping into changing intergenerational behavior towards managing the daily nitty-gritty online and on-the-go. These days, customers, especially the wealthy and educated, are increasingly using iPads and smartphones to manage banking transactions.

"We have to be available on their terms. It is no good saying: ‘I’ll meet you once a quarter,’" Hungerford says.

Besides the self-directed educated young professionals who are typically between 30-50 years old working in the UK, Nutmeg is also targeting higher end investors who could now get a similar private banking experience at a fraction of the cost.

In a climate where big private banks worldwide are trimming away smaller clients, Hungerford says Nutmeg is well placed to serve this pool of clients who are "used to be having their money managed."

For wealthy clients requiring sophisticated services, Nutmeg aims to outsource services such as estate planning and tax structuring to other companies.

"We have relationships with these organisations and we would recommend three people to whom they could choose from," he says.

Transparency tailwinds

Although still in its nascent beginnings, Nutmeg has ambitious plans to become the ‘Amazon of finance’. The company prides transparency in the same breath Amazon does.

"We are the first ones to post our performances on the website. Just like Amazon, we publish over 300 customer reviews online. No private banks do that," says Hungerford.

Furthermore, Nutmeg provides the much-needed transparency on fees – 1% a year for portfolios worth up to £25,000, plus fees on underlying funds which are 0.3% a year on average.

The urge for transparency follows on the heels of new regulation in the UK, which begun early last year. The Retail Distribution Review has prompted upfront fees to be taken from clients instead of the old commission model.

"I find that crazy and rather scary that this causes private banks so much pain to be honest about their charges," says Hungerford.

The Financial Conduct Authority appears to be swinging a timely tailwind in favour of online wealth managers as customers grow wary of paying fees.

"Our regulator is way ahead the US in terms of regulating online investment platforms and other asset classes that are coming through," Hungerford says.

 

First mover advantage

The company has attracted around 20,000 users so far and is considered by some as one of the fastest growing businesses in the UK wealth management sector. However, there is still a huge chunk of registered users who have yet to part with their money.

"If people are going to give you their money, they have to trust you," says Hungerford.

As a lone ranger in an emerging territory, the new online wealth manager admits the challenge in gaining public trust. New entrants are welcomed in the hope to allow the concept to gain traction. However, the dearth of venture capital in the UK is restricting the growth of fast-growing firms while banks have historically been slow to adapt to digital investment management.

"Private banks are not willing to go online because they are afraid it might cannabilise their existing business," Hungerford says.

The difference in fee structure for private banks and their online platform has been a bone of contention as customers can now choose a lower fee for the same investment service.

"Private banks are charging 1.5% and if their online platform is charging 0.3% which is 5 times lesser, customers will start to wonder if it is worth paying that much for the same service," says Hungerford.

Despite the hurdles ahead, Nutmeg aims to catch up with UK’s biggest online broker by market share, Hargreaves Lansdown, which has more than £39bn of assets under management.

Although Hungerford declines to disclose Nutmeg’s total funds under administration, he says the company would only become profitable in a couple of years as the infrastructure needed to support clients in a wide range of wealth is highly expensive to maintain.

However, akin to Amazon, razor thin profit is hardly a concern for Nutmeg as it is upping the ante on the mass affluent market who is seeking limited products and services.

"Most people only need advice when they get to a certain milestone. All they really need is effective investment management and based on the strong numbers we had last year, I believe we have proved that we can manage money really well," Hungerford says.

Aspirations

Drawing inspirations from the likes of Fidelity and Vanguard which have revolutionized the online delivery of financial services, Hungerford aspires to shake up online wealth management by building a strong base of highly satisfied clients.

"You can grow steadily by associating customers really well. This means getting a good net return by being cost effective," he says. "We set out to own the space of the 30-50 years old."

As an indication of customer satisfaction, a survey conducted by Nutmeg revealed that 97% of customers say they would recommend the service to a friend.

"Although people are coming to us primarily through our marketing, we are seeing an increase of people coming through word of mouth," Hungerford says.

Stretching the inspirational business acumen further, Hungerford says most employees in Nutmeg commit to the aspiration of a greater good along with the potential to be the "next Facebook" by having an equity stake in the company.

"Most people who come to Nutmeg will get a pay cut but it is much more exciting because you are dealing with real people and we are changing lives," he says.

Investors

This month Nigel Wray, chairman of Saracens rugby club, acquired a minority stake in the business.

Hungerford told PBI that Wray had made a "multi-million pound investment" in the firm, though the CEO remained tight lipped as to the actual sum of the deal.

Hungerford says: ""He is one of the UK’s most successful entrepreneurs and has vast experience across different global markets. His record as a leader and investor is second to none and his passion for the customer experience is completely aligned with mine and that of Nutmeg."

Other investors behind Nutmeg team include seasoned venture capital investment group, Pentech Ventures, renowned British economist John Kay and former president of T. Rowe Price International, R Todd Ruppert. Also on board is Klaus Hommels, a venture capitalist heavily involved in the development of Skype, Facebook and Zing, Swiss tech-entrepreneur Daniel Aegerter, and Tim Draper, who has been integral to the growth of Hotmail, Baidu and Overture.

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