Could you briefly outline your role as UK CEO and co-founder of Scalable Capital and your recent projects?
It’s my job to build and run our UK business. It’s going well so far...we’ve gone from a team of one, working in my kitchen, to a team of 50. More than half the team work in technology.
Last year was a busy one for us. We received FCA approval in February so could start on-boarding clients shortly after. We raised another £5.6 million in a funding round, expanded to Austria and launched our Stocks & Shares ISA. In December we hit £100m in assets under management and in April this year that number hit £200m. Having seen the success of our model, financial institutions have also begun partnering with us. Siemens Private Finance have selected us to provide a wealth management service for their employees in Germany.
So my recent projects have been big ones! Next on the list is the launch of our SIPP, which we are hoping to bring to market over the summer.
The influence of digital platforms and marketing is growing everywhere and it’s becoming increasingly conversational, what are the main constraints for the financial industry?
The advent of the digital era has allowed private wealth managers to offer their service at a lower cost, making discretionary investment management accessible to a much broader audience. That is a huge step, but it's only a first step. Cloud computing has made computational power so cheap, wealth managers can now do so much more. Simply being digital is not enough.
Why aren’t we seeing more companies really embracing digital power? They could be using algorithms to predict risk, similar to us. Typically if you hear someone talk about using an algorithm, all they are actually doing is static rebalancing back to the original asset allocation weightings, 60/40 for example. You don’t need an algorithm for that, just an excel spreadsheet and basic maths.
The challenge I see is for investors to understand exactly who is doing what in the digital space. Some competitors use similar language to us, but in reality are doing something very different. Understanding this distinction can be difficult as all digital wealth managers try to promote themselves as doing something new. In fact, their processes are far simpler than ours and what they are doing isn’t actually very different from what the traditional industry has been doing for decades.
I’m worried that a lot of consumers will have a hard time figuring out what the differences are between the investment philosophies of the different providers, even though the distinctions are extremely important and will impact their returns.
Is there a well of untapped potential that the industry has yet to ring out?
A huge amount! The vast majority of ISAs opened are still cash only. We want to get everyone learning about investing and how much harder their money will work for them in an investment portfolio versus a cash deposit account. Getting people out of cash and into suitable long-term investment products is key to solving one of the biggest social issues in the UK – people are living longer and they are not saving effectively. With interest rates at an all-time low and inflation rising, cash savers will find it difficult to retire.
There are 16 million people with investable assets of less than £100k that aren’t currently served well by the existing products on offer (primarily DIY options). Until the rise of the digital wealth managers, these people had very few options. They could either keep their savings in cash or spend lots of time managing their own portfolios and still typically underperform the market by 3 percent each year.
There are also 17 million millennials who require a different form of engagement to previous generations. Engaging this generation and allowing them a better future is a must for our industry.
What motivates you about digital and finance and what would an ideal world look like?
Back when I was at Goldman Sachs, I worked as part of a derivatives trading team - we were at the forefront of automation for institutional clients. It left me wondering why retail financial services still seem to be operating in the stone age when technology has opened up so many opportunities over the past 20 years. FS is one of the last sectors that hasn’t been disrupted yet.
What motivated me when starting Scalable Capital was to make this disruption happen, and to create a service that people truly deserved and that was not previously available. A service that I could recommend to my own mother.
An ideal world is one where you put the customer at the centre of the proposition and create a solution that is 10x better than the traditional offering. By specialising in one thing, solving a niche client need and doing it very well, consumer FinTechs are building services that clients love. This means that traditional banks, which offer every product and service to their clients, are being disintermediated. We saw this with firms such as Transferwise (offering a great currency exchange service) and Funding Circle (offering a great way for people to directly lend to businesses they know and love). It is here that Scalable Capital enters the picture.
 Source: http://www.northstarfinancial.com/files/6314/6523/9571/2016_DALBAR_Advisor_Edition.pdf
If you could make a survival tool kit for businesses in the digital pace, what would it entail and why?
If you're willing to start a business in the digital space, your break-even point will depend on your ability to scale efficiently and drive new customer conversions through unpaid channels, such as referrals or B2B partnerships. Those companies offering a product that isn’t easily replicable or will be the most successful at this early stage.
In digital wealth management, a new wave of robos, including Scalable Capital, have taken the next step. New robo-advisors or ‘robo-advisors 2.0’ are putting technology at the heart of the investment process and by doing so are bringing institutional-quality investment management to a retail audience instead of offering ‘more of the same’.
This kind of technology-driven product is not something that big banks or wealth managers can create easily. They lack the technology, struggle to attract the best software engineers and often lack the financial econometrics experts required to calibrate such data-driven models. They are also not products that established players will necessarily even want to build - they threaten to cannibalise their more traditional offering which earns several percentage points in fees (compared to an all-in management fee of 0.75 percent p.a. at Scalable Capital).
Our financial strength comes from building a strong team who understand the financial landscape (both commercially and regulatory). Our technology comes from a core emphasis on building proprietary technology. Our people comes from a focus on finding the ideal talent to suit our demanding requirements when it comes to technical and financial knowledge. Every person on the team has to fit the bill and be right for our long-term strategy, as well as ‘right now’. Many are keen purely because FinTech is a ‘hot’ sector to get into. That’s not what Scalable Capital is about: we’re in it for the long haul, which is why finding the right candidate takes a lot of hard work.
How do you go about turning an inspiration into reality? Can you share a story?
There was no ‘eureka’ moment as such. It was an idea that dawned on my colleagues and I as we all came up against the same problem: when our friends and family asked how they should be investing their money, we couldn’t see a decent solution in the market. We set about solving this problem ourselves.
While at Goldman, I would spend hours on end bouncing ideas off my colleague Florian Prucker. We would brainstorm how we could combine what we’d learned while helping develop one of Goldman’s investing platforms with cutting edge academic research and the latest advances in computational modelling. We had witnessed the power of technology to improve investing in financial institutions and wanted to take it beyond them, to the likes of my friends and family.
The final trigger was in 2014 when Florian and I met to see what we could pull together from those discussions. What was supposed to be a quick Saturday lunch ended up lasting nine hours, as we hammered out the details of what would eventually become Scalable Capital.
We quit, one by one… to build Scalable Capital. Florian left first, in the summer of 2014. I followed about a month later. It wasn’t easy to leave the place I had spent my entire professional career, but I was confident in what we set out to build.
Top digital trend you’re excited about?
I’m excited at the arrival of new regulations to create an open banking framework, like the second Payment Services Directive (PSD2) from the European Union. Banks will be forced to offer data access through Open APIs (Application Programme Interfaces). This comes into law next year, and means that any third party with a trusted licence can ask for customer data and the bank, by law, must provide easy access to that data through plug-and-play software.
This opens up a wealth of opportunities for the development of the multi-market digital wealth movement. Potentially it will allow us to become the centre of someone’s financial life.