Last Friday, Gina Miller, co-founder of SCM Direct, delivered some strongly critical comments in an FT Adviser article regarding Nutmeg and the risk profiling it performs on clients as part of its suitability assessment. Both firms advocate discretionary allocation of portfolios constructed from ETFs with low, transparent fees, but currently Nutmeg is receiving more publicity and plaudits, despite SCM Direct actually having a lower headline fee.

We’ll now delve into some detail of Nutmeg’s account opening process that even FT Adviser opted to steer clear of, so bear with us, but the starting point for investing with Nutmeg is to choose your amount to invest, an optional timeframe and your preferred portfolio, with a risk level from 1 to 10. At this point you get some information about the portfolio and some projections of its potential growth – so far, only generic, non-regulated advice has been offered.

Only when you have confirmed your portfolio choice, entirely self-directed, are you then asked to complete a questionnaire to determine your attitude to risk – the decision tree Gina Miller refers to in the FT article – and once you’ve done so, you might see something like this, including the enlarged comment on your portfolio choice:

Nutmeg Suitability

It is easy to pick holes in Nutmeg’s questionnaire – it is overly long, and frames stock market fluctuations in a very negative light which could unnecessarily put off inexperienced investors. By comparison, the comment that you see once you’ve completed it, showing the portfolio, the usual risk level chosen by people with the same timeframe and attitude to risk as you, appears sensible.

The use of ‘preferred risk level’ is important – it is a clear attempt by Nutmeg to pass this off as being not related to a specific investment product, and so as non-regulated generic advice. However given that Nutmeg has 10 risk-adjusted portfolios, with your portfolio determined solely by your chosen risk level this is, at best, sailing very close to the advisory wind. Given the FCA, in the guidance on retail investment advice it released in January 2015, explicitly states that a comment such as ‘people like you buy this product’ is investment advice, Nutmeg must be very confident in the dialogue with the FCA that its CEO Nick Hungerford alluded to in the article.

Miller’s complaint is understandable, but when you remember the FCA’s mission to help improve customer outcomes, you can see why it is willing to allow Nutmeg’s approach. An operator cannot adequately understand its client’s approach to risk without carrying out a risk questionnaire. Yet having performed the suitability assessment and found, as in the case highlighted above, that the client has chosen a totally unsuitable portfolio it can’t stay silent either. The advice, whether it is generic or specific investment advice, is clearly helping to improve the customer outcome.

On the face of it, it appears incompatible for firms offering such generic investment management services to carry out a suitability assessment including a risk assessment, or provide a suitability report, without at the same time offering investment advice. Certainly SCM thinks so – it doesn’t offer a risk assessment or a suitability report – and it’s questionable why Nutmeg wishes to do so.

Getting rid of suitability assessments would stop people being put off by Nutmeg’s questionnaire. Instead Nutmeg, and SCM if it wished to, could provide more generic, non-regulated advice elsewhere on its site, away from the investment choice. By helping customers understand their attitude to risk elsewhere on the site operators can help them make better decisions and achieve even better outcomes, without blurring the lines regarding regulated investment advice.


The Perfect Storm

The current regulations around retail investment advice can be improved for everyone – government, customers and operators all have a clear incentive for change. The Government has a significant financial incentive to ensure people are better advised, prepared and secure for their retirement. Retail brokers, banks and advisers need to see a reduction in the regulatory burden and associated risks of advising customers and retail customers need an alternative to the current offerings. The last time such a perfect storm occurred was in late 2012, when the Government and the FCA came together with the crowdfunding industry to deliver an outcome that was favourable for everyone. Can the same thing happen again?

Current Situation

There are a lot of start-up ‘fintech’ companies looking to address the retail investing sector, such as Investyourway, Nutmeg and Swanest. They all have differing approaches, but in general these are products that people can choose once they know what they should be doing. They are not addressing the ‘Advice Gap’, though a provider such as Moneyontoast does offer both online advice and a resulting portfolio.

The current UK regulatory environment is not conducive to new entrants offering innovative approaches to guidance or advice but does suit established players applying for additional or variations of permission.  We welcome the fact that execution only broker TD Direct recently applied for and received a new FCA permission to provide ‘specific, non-personal online, advice’ on investments. This advice is not deemed to be a personal recommendation and the lower regulatory obligations make it a more viable service for certain operators to offer.

The Role of Social

What we like most about the HM Treasury announcement is the statement ‘consider ways to encourage people to seek financial advice’.  This means they clearly have to be thinking beyond the existing unregulated ‘Money Advice Service’ provided by the Government. One such way is to consider the provision of tools that maximise the benefit of using friends, family and colleagues for help when making financial decisions. We call it social investing and believe that it can be used to bridge not only the ‘advice gap’, but also the ‘confidence gap’ which exists and stops customers making the move into retail investing.  We have looked at this in more detail in our earlier white paper “Social Investing – Opportunity to Address the Confidence Gap”.

confidence gap

What’s in it for the Government?

Take some risks now to create the optimum regulatory and business environment to address this significant challenge. Get it right and it will help ensure operators innovate and develop the right solutions and millions of people could be better off in retirement. Get it wrong and the burden on the state of millions of middle income individuals not properly prepared for retirement will be far more significant.