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December 17, 2013updated 11 Jan 2016 1:12pm

The digital operators that are shaking up old-school wealth management

By Spear's

CHIP AND WIN

Tired of your slow, stuffy private banker? The digital revolution is giving them a run for your money

‘The stereotypical view of a stockbroker is someone who says, “I’m smarter than you, give me all your money,” then tucks it away behind the desk and goes to the pub. I hope we can do better than that.’ So says Nick Hungerford of Nutmeg. It’s a service that manages your investment online, using easy-to-understand charts that show you projected returns according to your risk tolerance and goals. They don’t boast the heritage of many wealth managers but, with average returns of 12.3 per cent and fees of just 0.3 per cent on £500,000 or more, they don’t feel obliged to.

Out of the recent economic crisis, hundreds of new services have sprung up hoping to signify a departure from the mismanagement of large banks that triggered the worst financial disaster in living memory. Those wanting to make a difference are young former company men who have their finger on the pulse of a new generation of technically savvy investors who have grown up with, and rich from, phenomena such as Facebook and Twitter.

Read more on asset management from Spear’s

The rise of alternative forms of wealth management — which include Nutmeg’s online operations, the digital emulation of successful traders and the reading of social media for market-moving data — is cast as a battle between gleaming technology kids and the cobweb-shrouded dinosaurs of Mayfair. It’s a perceived battle that Hungerford, who was nominated for Entrepreneur of the Year at the Spear’s Wealth Management Awards 2013, is happy to lead. Having worked for Barclays, Gerrard and Brewin Dolphin, he doesn’t see the appeal any more.

‘It’s seven to eight weeks before your money gets invested. Our average time is under ten minutes — from zero to invest, we’re really transforming the industry. The alternative is to go and buy a fund that’s named after a planet… and you’re probably paying more for that one actively managed fund than you are for Nutmeg’s regularly balanced, multi-asset class, globally diversified portfolio management service, and that’s slightly insane.’

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Hungerford is not alone in his disillusionment with traditional means of wealth management; he’s just one of a rapidly expanding class of entrepreneurs who discount the jargon, Savile Row suits and oak-panelled offices that are the badges of typical Mayfair wealth investors. Alon Levitan, head of marketing at online trading network eToro, echoes the sentiment: ‘After the previous companies I’d worked for, the main emotion I was feeling when I joined eToro was basically frustration and anger because [portfolio management/investment] was so simple to understand and yet I’d reached the age of 30 and then some and no one had explained it to me. All my life I was led to believe it was too complicated to understand and I should trust the people with suits to handle my money.’

Levitan enthuses about the importance of social media to eToro, which lets amateur users copy the profiles of ranked profit-making traders, matching them trade for trade, giving them a platform to interact as well as complete freedom to execute any other investments they want, thereby encouraging an interested learning process.

‘The entire financial industry is built on the fact they know something that the small Joe doesn’t; they have all that information at their fingertips,’ he says. ‘What we’re doing now is connecting all those people from all over the world and there’s a very active exchange of information and knowledge happening on the network; there’s access to information on local markets which people have never had. It’s like flattening the world — everybody now has an equal chance to get the same information and act upon it. It’s democratising and it’s empowering the users.’ This form of connected thinking has seen eToro’s social engagement go up by 260 per cent a year, including an increase in mobile app users by 178 per cent.

Such is the power of social media that those looking to gain an edge in the world of big data economics and equity finance are looking to harness it. Eagle Alpha specialises in sourcing market-sensitive tweets and sending them directly to subscribers. I tried it: the service is impressive. I received tweets on pay rises for Libyan oil workers, Ryanair pilot strikes and explosions at Belgian refineries — news I couldn’t find elsewhere as quickly. Unsubstantiated tweets are flagged and you can access an account tailored to your interests; they filter the 50,000 daily tweets on the FTSE 350 and publish an average of 100 using artificial and human intelligence.

Emmett Kilduff, founder and CEO, told me: ‘There’s a lot of times a tweet is only retweeted twice but it can still move stock, so you need more human judgment to identify it.’ Crucially, when it mattered, the system didn’t fail. The Syrian Electronic Army hacked the Associated Press in April 2013 to tweet about a bomb attack on the White House. It was dubbed ‘HackCrash’ and caused the markets to lose $136.5 billion before the hoax was realised and they recovered.

‘We knew that was fake for two reasons: if you corroborate that globally you couldn’t find any other tweets that said there was a bomb in the White House, and the Syrian Electronic Army didn’t follow the AP style guide — “breaking” was lower case, it should have been “President” Barack Obama and it should have been “The” White House,’ explains Kilduff. Simple things, but if the traders in New York had had Eagle Alpha they could have minimised their exposure to an incident that caused huge embarrassment for a profession based on verification.

Theory of (R)evolution

Those within the banking houses, perhaps keen not to seem like those cobwed-encrusted dinosaurs, claim they see evolution rather than revolution and downplay the sense of industry civil war stoked by Hungerford. ‘He’s got some great people on his team and I wish him all the best,’ says a former colleague of Hungerford who is now at Rathbones. ‘I’m fascinated by it. I think their target market is not necessarily our one. I think it’s great to have some pressures on fees and costs and offer something different. I hope it succeeds.’

Asked whether they envisage an element of competition, the Rathbones banker emphasises the different ballparks: ‘The personal level of service that we provide to clients is as important to them as investment performances, and I just can’t see that shift happening from our types of clients any time soon, so I feel very confident we’re in different markets despite trying to offer similar exposure.’

When it comes to getting that exposure, Hungerford is critical of what another City source described as the ‘snob factor’: ‘It’s all very well being a jolly nice chap, but you’ve got to deliver the performance. Companies tell me, “We really know what our clients want and they don’t want to deal over the internet.” I look at them and think, “I’m not sure that they do know what their clients want,” because the wealthier people are, the more they want to interact on their tablets, on their smartphones, through the internet… They’re looking in the mirror rather than asking their clients.’

Brave new world

However, having survived for centuries, many such companies are adapting to survive several more. Ian Ewart, head of products, services and marketing at Coutts, certainly thinks so: ‘Our very reason for being is to simplify and bring simplification to bear in the complex lives of our clients. We increasingly integrate that service through online and increasingly through an app. What we try and offer through that is obviously a full banking service.’

Ewart identifies ‘continuous innovation’ as essential: ‘Financial services had thought it needed to rely on products. I think it’s much more innovation around wealth management and the actually holistic solution we bring to our clients.’

Undoubtedly technology has transformed the services offered in wealth management and investment banking. Like others in the industry, Ewart recognises the importance of the alternatives that have sprung up. ‘Absolutely,’ he says when I ask him whether he thinks of them as a legacy of the recession; he sees a changing landscape in which banks in the post-RDR world are re-evaluating what they have to do in order to win and maintain clients, and for the likes of Coutts ‘that’s a very interesting conversation to explore in terms of who will be doing what, and what people will value and what they will pay for’.

Some traditional wealth managers ought to be scared of that conversation, says Nutmeg’s Hungerford: ‘If you’re ready, you’re ready for it. If you’re not, you’re gonna die.’

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