A NEW breed of low-cost, online wealth manager is luring customers from Britain’s biggest private banks, serving as a wake-up call for the 400-year-old industry to innovate digitally.

Start-up wealth managers such as Nutmeg and Wealth Horizon have emerged in the past few years, offering online access to investment expertise or financial advice, often at a fraction of the cost of private banks.

Rising demand for online and mobile services and the increasing expense of gaining financial advice have created an opportunity for these start-ups.

Nearly 40m mobile and internet banking transactions were made each week in 2013, according to figures from the British Bankers’ Association. Banking mobile applications were used 18.6m times a week - more than double the number in 2012.

Private bankers admit they are concerned that online firms are attracting their customers, galvanising them to improve their own digital services or risk shedding clients.

Start-ups offer financial advice, often at a fraction of the cost of traditional entities

Hein Van der Loo, head of strategy at ABN Amro, warned private banks ‘are set to lose’ to online start-ups if they do not embrace digital services for customers, which he believes is ‘a key success factor’.

“We do see a shift in competition to these new companies and it’s up to banks to keep up to speed to remain competitive,” he said.

Although many online companies cater for investors with smaller portfolios, a number of sophisticated customers are also handing over a portion of their wealth.

“It is of interest for private banking clients; it is a myth interpreting it for retail clients only,” Mr Van der Loo said. “This is not just for younger clients, it is also for senior clients. We see them being very modern in using digital services among banks.”

Online wealth managers are still in their infancy in the UK - and many are heavily loss-making.

Nutmeg, for example, which was founded by Nick Hungerford, a former Barclays Wealth employee, from a garage in Silicon Valley in 2011, posted a £3.6m loss last year, double the amount from the previous year. Mr Hungerford said that this was a result of investing in infrastructure and marketing in order to expand the business, with operating expenses amounting to £3.8m.

He expected the firm could double that loss over the next two to three years as it continues to spend on building its customer base and achieving scale.

The wealth manager has over 35,000 registered users and customer acquisition in the first quarter was 350 per cent up on the same period last year.

Its services are much cheaper than those provided by private banks - it offers a range of portfolios managed on behalf of investors for as little as 0.6pc a year, including VAT and trading costs. By comparison, private banks and traditional wealth managers charge as much as 7.5pc a year, according to Numis Securities, a broker.

Mr Hungerford said private banking clients were also attracted by easier account opening and the closer links to managers available through digital channels.

“Instead of receiving a valuation every six months, we deliver a written report every month and a video,” he said. “The old way was face-to-face meetings; but the wealthier professional types also love instant chat.”

About 92pc of investors around the world with an average amount of $2.9m are using digital services ‘extensively’ to guide their wealth management, according to research by Scorpio Partnership, SEI and NPG Wealth Management.

“The definition of what constitutes a wealth management relationship is evolving,” said Sebastian Dovey, managing partner of Scorpio Partnership. He said banks were being forced to shift digital capabilities from their ‘supporting role further into the value proposition’.

Using mobile devices to access wealth managers will be key to staying ahead of the pack. “It’s about the ability to deliver through any device the consumer chooses,” said Ian McKenna, director of the Finance & Technology Research Centre. “We’re all pretty much wedded to our mobile phones these days. A lot of start-ups are taking the mobile-first approach.”

However, while some private banks are gearing up to meet the challenge, they claim the threat is currently minimal.

Some online competitors - such as Wealth Horizon - can refer customers back to traditional planning firms for more complex matters, such as inheritance tax issues.

Joe Norburn, head of digital at Coutts, the UK’s largest private bank, said: “We haven’t seen a material impact just yet; but we can’t rest on our laurels and assume that will be the case going forward.”

According to FT special report on private banking, Coutts is planning to unveil digital tools next year to help customers plan their wealth goals and portfolios. But he emphasises the digital development will not ‘disintermediate the adviser’, which he believes is a key advantage of the private bank offering over the online start-ups.

Anne Grim, head of client experience at Barclays, said the bank had already digitised the process for signing up new customers, meaning it took hours instead of weeks.

A report by consultancy firm Deloitte found that wealth manager start-ups may ‘increasingly poach clients who no longer feel the need to consult with a human expert for basic investment decisions’.

Private banks say their advantage is an established brand, scale and a personalised customer experience. But to remain ahead of the pack, digital innovation is now imperative.

Lessons to learn: UK digital services are behind US counterparts Digital wealth management companies in the UK are only in their infancy, but they have much to learn from their older US cousins.

From online advice services to low-cost investment management, digital start-ups in the US have grown by targeting investor needs that are not being satisfied by traditional wealth managers.

A study by Deloitte found that few incumbents have responded to the threat posed by online start-ups, but said ‘the tide is starting to turn’ as a growing number are beginning to invest in digital capabilities.

iQuantifi, launched earlier this year, is one of the first virtual advisers providing financial planning services for less than $10 a month.

Based online, the virtual service claims to provide real-time investment advice as markets move and personal circumstances change.

LearnVest, for example, is recruiting financial planners to service all US times zones.

“Positioning their service like Weight Watchers for financial advice, they offer a range of personal financial advice services via telephone or online using highly sophisticated financial planning software, with prices starting from around $29 a month,” added Mr McKenna.

Published in Dawn, Economic & Business, October 20th, 2014