Shaping your money well

Small investors have been neglected in recent years, but one Newcastle firm is coming up with a solution to help

Investing has never looked more complicated. Interest rates are close to zero and stock markets are highly volatile, rocked by a succession of frightening economic headlines.

Yet the poor small investors are largely being left to navigate these turbulent investment waters on their own.

There was a time when they could consult Independent Financial Advisers, IFAs, for investment guidance but in 2012 there was a change in the regulations governing how they operate. The Retail Distribution Review, RDR, introduced in 2012, changed the way in which IFAs could charge for their services, the result of which was to make it uneconomic for them to advise smaller investors.

This has created an advice gap.

John Dance, co-founder of Jesmond-based discretionary investment management firm Vertem Asset Management, explains;

“This advice gap has meant that clients with typically less than £50,000 to invest – or even higher amounts – are finding it harder to find someone who will advise them.’’

With £50,000 here and £50,000 there, pretty soon you are talking serious money, particularly when, according to recent studies, there are as many as 43 million British citizens who fall into this category. In fact, it is estimated that they are worth up to an astonishing £440bn in investable assets.

Some of these people are using execution only broking services without advice, taking their investment lives into their own hands, while others are, presumably, accepting whatever paltry rate of interest their banks are offering.

It is in response to this need and gap in the market that over the past 12 months or so, there has been an extraordinary rise in so-called roboadvice services with two of the leaders being Nutmeg and Money on Toast.

“These are companies that appeal direct to the consumer and offer a kind of simplified advice to making investments and investment planning,’’ says Dance.

The services are online and work by asking the investor a series of questions to determine the appropriate level of risk for them and which they are willing to take and other factors such as investment aims.

“They will blend the two: your ability to take risk with your desire to take risk and recommend an off-the-shelf investment proposition that’s hopefully broadly in line with your needs,’’ says Dance. “It’s not the full wealth management picture that an IFA would do for you, such as ensuring you had the right insurance in place, telling you you should be paying off a bit of your mortgage rather than investing, ensuring you’re saving enough and so on. It’s trying to offer a basic service in terms of trying to give you a suitable investment portfolio.’’

The roboadvice provider will recommend one of its own portfolio products so that two investors with the same risk profile will be investing in the same product.

“It’s using economies of scale at the investment level using technology to drive you to which one of these markets you should be sat in,’’ says Dance. “Unlike a human being going through this process with you, it’s essentially an algorithm that controls the decision tree.’’

Ideally the algorithm will take the same forks in the decision tree in response to the investor’s preferences as an investment adviser would in a face-to-face interview.

The provider charges an annual fee based on a percentage of the investment value.

Now North East-based Vertem is entering the market with its own roboadvice service.

The firm was founded just under six years ago by John Dance and Gary Stockdale who worked for brokers Brewin Dolphin in Newcastle. They wanted greater investment freedom and saw an opportunity to provide a service to the IFA industry in a way which would allow the IFAs to enhance their business.

RDR was implemented shortly after Vertem’s foundation which gave a useful boost to the fledgling firm by making it harder for IFAs to manage investments themselves.

“We were lucky because that led the IFA industry, or at least large parts of it, to outsource the investment part of their role to specialist investment managers,’’ says Dance.

Vertem has grown from the original two founders to being a team of 11 in Jesmond, two in London and two in Edinburgh. It has clients around the country but particularly in Buckingham and the Carlisle area.

“We have more assets under management than we ever dreamed we would get to – about £260m,’’ says Dance. “So we are tiny in terms of the financial services industry but we are a lot bigger than we ever thought we would be and we are growing rapidly. We have something a little bit unique and we have the potential to outperform our rivals.’’

And, with the growth of roboadvice, Vertem is poised for the next phase of its expansion. Its own roboadvice service U-Manage has been devised to overcome a weakness the firm sees with the other services.

Dance explains: “We are building in our own proprietary risk assessment questionnaire. We felt that in order to be visually simplistic existing options were perhaps coming out with the wrong outcomes.’’

He cites the example of one roboadvice platform which he told he had £25,000 to invest for 15 years. He answered the various risk questions and was then asked whether, at some point over the 15 years, he expected to need any of the capital, to which he said yes. However, the programme did not ask him what he might need the capital for, how much or how important the draw down would be.

He says: “In the end it said you have been assessed as having attitude to risk of eight, however, as you need access to the capital in the interim, we have recommended that you only take level of risk number four and this is therefore the portfolio we recommend.’’

As Dance points out, there is a world of difference between wanting to draw on capital for a holiday in the sun – which might be classified as a nice-to-have – and paying for a child’s university education, which could be seen as more of a necessity.

U-Manage’s risk assessment questionnaire, however, will establish how much of their capital an investor might want access to and how important that is to them.

Vertem is launching U-Manage in order to provide a service to its own IFA clients.

“While we recognise that there are clients in this advice gap who might not be economical to IFAs in this point in their life-cycle, they are the breeding ground of tomorrow’s economically viable clients,’’ says Dance.

“We had the idea that we could create a really sharp roboadvice system that could be installed on each IFA’s website with their branding and where some of the parameters could also be defined by that IFA.’’

He adds: “We hope that by doing that, IFAs don’t lose that nursery ground of tomorrow’s economic clients, but don’t have to put in the unpaid hours that normally would have to come with it and also meant that we could come up with a robo solution that didn’t conflict with our original business of working with IFAs.’’

For this reason, U-Manage will be exclusively available through IFAs. It is anticipated that U-Manage would be suitable for an initial £10,000 lump sum with the ability to make regular contributions from £150 a month and the portfolio could be packaged as an ISA. Unlike other roboadvice platforms, this will allow the transfer of existing portfolios.

Investors will not need a high level of financial experience and expertise and the site’s home page will include a `how to’ video.

Once a year investors will be prompted to revisit the answers they made to the questionnaire to ensure their risk profile is still appropriate.

Dance says: “Perhaps they’ve moved up the career ladder at work and they are feeling a bit more flush and secure in themselves and will answer the risk questions slightly more aggressively than they did previously. Also as people get closer to retirement they will feel less inclined to take risk.’’

IFAs will not be able to give U-Manage investors investment advice but they will be able to guide them on how to use the system.

Given that markets at the moment are so scary with pundits predicting all manner of terrible things on the horizon, wouldn’t the investor be better off playing safe and avoiding the stock market?

“Sometimes the biggest risk is to take no risk at all,’’ says Dance. “Certainly at this point when headline indices have fallen so far, the biggest danger now would be not being invested. That’s not to say the market can’t fall further but it’s just as likely that it will rebound and rebound potentially quite hard at some point.’’

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