JP Morgan’s purchase of robo-adviser Nutmeg, reportedly for around £700m, earlier this year, sparked much attention in the industry - as did Barclays and Scalable Capital’s partnership last year with the launch of new digital advice offering Plan & Invest. With news that Britain’s biggest high street lender, Lloyds, is set to follow this partnering trend with the £390m acquisition of investment and retirement platform business Embark, could this herald a new era for digital investment management and banking partnerships?
So, what are the benefits of these new partnerships? Who are the players targeting and what does this mean for the future of the industry?
The growth of robo-advice
The world’s first robo-adviser, Betterment, launched in 2008 as a low-cost automated digital investment platform, providing algorithm-driven financial advice. Viewed by the industry as a potential competitor, it also opened the doors for wealth management firms to acquire or create their own virtual advisory platforms.
Robo-advice currently holds a relatively small market share in the UK. According to GlobalData’s 2020 Global Wealth Managers Survey, just 3.4% of retail investors currently prefer to use this channel to arrange investments, though 66% of UK wealth managers agree that traditional players will continue losing market share to robo-advisers.
A ‘hiccup’ in the market, alongside the difficulty in making them a profitable business arm, has seen UBS, Investec and other larger institutions close down their robo-adviser platforms in the past decade. But the global pandemic’s acceleration of digital transformation and continued support from millennials, has seen a turnaround for robo-advisers, with a 30% increase of managed assets from 2019, with $460bn managed globally in 2020.
This substantial growth and an increasingly digital-centric world, is likely to see this trend continue with analysts predicting robo-advising will become a $1.2 trillion industry by 2024.
The benefits of digital partnerships
JP Morgan and Lloyds both have strong motives for joining forces with digital businesses.
JP Morgan’s partnership with Nutmeg is intended to provide a ready-made investment solution to complement the company’s new digital bank, JP Morgan Chase, which it plans to launch in the UK later this year. Nutmeg has a solid foundation with around 140,000 customers and managed assets of around £3.5bn, but the bank is looking to leverage the technology and counter the threat from fintechs.
In his annual letter to shareholders in April, Jamie Dimon, CEO of JP Morgan Chase, stated that fintechs have “done a great job in developing easy-to-use, intuitive, fast and smart products” while acknowledging that banks are held back by “inflexible legacy systems” and “extensive regulation”.
Meanwhile, Lloyds’ deal with Embark - which has more than £400bn under administration, 500,000 customers across the country and was recently named one of Britain’s most important fintechs - will help the bank increase the reach of its investment offerings and support its robo-advice business ambitions.
Antonio Lorenzo, Chief Executive, Scottish Widows and Group Director, Insurance & Wealth, Lloyds Banking Group said: “Through Embark’s technology, we will be able to increase the reach of our investment offerings for customers who are happy to manage their own portfolios, through modern, easy to use technology.”
For both banks, speed to market, the combining of tech and banking experts to provide a positive customer experience and meeting customer expectations through digital investment services, are key partnership wins.
Expanding their customer reach through a hybrid approach to investment management, particularly to the millennials who are big supporters of digital investment platforms and whose wealth is likely to accrue in future years, will also be a consideration.
What’s the future of the industry?
The neobanks are also broadening their offerings, with recent announcements of growth into the investment space. Recently valued $33bn digital bank, Revolut, is planning on adding robo-investing to its product suite, while Marcus, Goldman Sachs’ digital bank, is set to bring its US offering ‘Marcus Invest’ to the UK later this year.
With digital investment platforms and digital wealth management here to stay, the banking industry needs to remain flexible in its processes and its partnerships.
Joining forces with digital experts such as Nutmeg and Embark, enables banks to grow their breadth of offerings and to pivot much more quickly than they would alone.
No tech giants have yet made a deliberate move into the wealth management sector, but entry in the not-too-distant future appears likely. Apple has already created a financial and advisory services provider (Braeburn Capital) to manage a large amount of its cash reserves and Asian tech companies such as Alibaba and Tencent have made major investments in a leading Chinese investment bank.
To keep up with tech innovations, remain relevant in the market and meet the emerging needs of its customers, the banking industry needs to consider partnering with those who already have a foothold in the digital space, leveraging specialist strengths and becoming more agile and digital.
Investment company abrdn (formerly Standard Life Aberdeen) recently concluded a deal to buy Exo Investing from Nucoro for an undisclosed sum. The acquisition will help abrdn develop an industry-leading technology solution for investors, powered by the Nucoro Platform. It is expected to complete by the end of the year.
While few expect robo-advisers to replace human consultants in the near future, hybrid services that combine human and digital advice can be a major win for investments in partnerships, enhancing the digital customer service and allowing advisers to spend more time on what really matters: building relationships with clients.
If your bank would like to explore whether a digital investment platform could help you deliver services that add value to customers and keep them in your ecosystem, please get in touch.