TUCKED away down a dilapidated south London backstreet is the head office of Nutmeg, a start-up with ambitious aims to marry up an old financial service with new technology.

The centuries-old practice of traditional wealth managers investing money on behalf of customers is ripe for innovation by the disruptive capabilities of digital tech, says Nutmeg’s 34-year-old co-founder and chief executive Nick Hungerford. His sharp blue suit and gold signet ring — which catches the light as he gesticulates — contrast with the austere rented office in Vauxhall.

“We expect to break even in three or four years,” says Mr Hungerford, who has a stake of about 10pc in the company.

In fact, he explains, losses will widen as Nutmeg pushes for growth. “We are running at a £4m loss this year, which will widen to £7m-10m next year.”

Having managed money for wealthy customers for six years, including at Barclays Wealth, Mr Hungerford went to the US to study for an MBA at Stanford Graduate School of Business, California. It was there in 2010 that the idea for the first version of Nutmeg was born.

“People who knew I worked in finance asked if I could manage their money,” he says. The problem, he realised, was that they did not have enough money to interest traditional wealth management firms, who charge ‘extortionate’ fees anyway. For their part, aspiring investors pondering whether to ‘go it alone’ with little experience find the prospect daunting and risky.

“So I made a business plan for a new type of company,” he says, having been encouraged by Eric Schmidt, then chief executive of Google, who was teaching at Stanford.

“You know it’s time to go for it when the risk shifts from doing something, to not doing something. If you’re worried about leaving your job, then you’re not ready,” he says. “The first version lasted two weeks. It was ‘e-Harmony [the dating website] for customers and advisers’, matching them together.”

But it became clear that advisers would not want to be matched with only a handful of clients. “So that’s when I morphed it [the plan] into Amazon for wealth managers.”

Like Amazon, Nutmeg offers an online, low-cost service; and, like a traditional wealth management firm, the start-up has professionals who invest money on customers’ behalf. However, they do not provide advice, which would be more expensive and involve an extra regulatory burden.

Nutmeg potentially opens up money management to the masses because it is affordable. The minimum for investment is £1,000. Even those who have long been customers of private-wealth firms are trying it out by giving a portion of their portfolio to Nutmeg to run, Mr Hungerford says. He declines to reveal the total amount managed by Nutmeg, which, he explains, can charge less by using a new kind of investment called exchange traded funds (ETFs).

Unlike traditional funds where a manager selects stocks, these funds follow an index of shares or bonds, for a lower fee. “People wanted top quality wealth management but delivered in a way that’s suited to them — via the internet, for example. It’s also fast if it’s online,” he says.

The rise of ETFs is an ‘inevitable wave’ because fund managers have performed too poorly for too high a price.

The lowest annual cost investors can end up paying is 0.6pc a year. Costs can be higher according to what exactly the investor chooses to invest in, and how much money they have. Getting Nutmeg off the ground involved a long, hard grind. “I was working in a garage in Silicon Valley for four months, where my friend stored lots of 1960s clothes.”

Along with his uncle William Todd, a financial services software expert, and a couple of Stanford classmates, Mr Hungerford recalls how he pitched the idea for Nutmeg nearly 50 times before securing investment. “Everyone said, ‘How do we expect to beat the big banks? They’ve been alive for 300 years.’”

Then Tim Draper, a prominent venture capitalist in Silicon Valley who invested in companies such as Hotmail and Skype, came on board. “He asked me 10 minutes into the pitch, who’s in my team?” says Mr Hungerford. Then he said it was ‘a very good idea. I was the first person to pitch it’.

By now, in 2011, regulators in the UK were working on ensuring transparency of fees in financial services, while fintech, a term denoting innovations in financial services facilitated by digital technology, was becoming established. “It became clear Britain was the optimal place to start. It was the start of a push to make the UK the centre of fintech.”

Other significant investors started to sign up. Pentech, a venture capital firm, invested about £1.5m, and it has also received about £3m from Nigel Wray, a City financier. John Kay, an economist and Financial Times columnist, invested an undisclosed sum last year. This year, Europe’s second largest asset manager Schroders became involved in another fundraising of £20m, along with Balderton Capital.

Nutmeg is a trailblazer in the UK but other online wealth management firms have emerged: Former hedge fund manager Alan Miller, who co-founded investment boutique SCM Private with his wife Gina, has launched online portals tailored to different demographics seeking money management expertise.

“The target is those customers going to well-known names for a managed portfolio, but where fees are around 3pc,” says Mr Miller. The SCM Direct sites offer wealth management for about 1.2pc a year. Wealth Horizon aims to provide basic financial advice for consumers at a low cost. Founder Chris Williams has more than two decades of experience. The firm allows people to invest, with the option of speaking to an adviser, who can ultimately refer customers to traditional planning firms for more complex matters.

Published in Dawn, Economic & Business, December 8th , 2014