As we continue with our FinTech business series we would like to present our first Company Profile Snapshot. At the end of February we had an opportunity to dive into the world of WealthTech with the founders of Scalable Capital: Adam French, Ella Rabener and Simon Miller.
Episode 1. How Scalable Capital was started, what services they provide and who the clients are.
Episode 2. Scalable Capital’s operating model, the composition and skills of their team, the governance processes, and partnerships.
Episode 3. Three ways Scalable Capital differentiates from traditional asset managers.
Episode 4. Funding and performance of Scalable Capital.
Episode 5. The future of Scalable Capital and the future of the WealthTech industry.
Scalable Capital is a fast growing online investment manager which is truly living up to its name. From day one scalability has been a key design principle, whether for a technological, administrative or operational aspect of the business.
As a technology company, the use of cloud computing, APIs and automation of both client onboarding and service delivery gives an almost unlimited potential for business growth. Forget the traditional Front, Middle and Back Office with thousands of people running the business. The modern financial institution consists of a Front-End, APIs and Cloud Computing. All components of the infrastructure talk to each other through APIs. These APIs can perform rules-based communications securely and effectively, removing the need for a middle office and the front end is delivered online without the need for sales staff and advisors – clients can open an account or place a deposit with just a couple of clicks. In addition, cloud technology enables calculations which humans would not be able to complete in a lifetime and the entire business model is built for scale.
Scalable Capital opened their offices in Munich and London pretty much at the same time, aiming to be international right from the beginning. When they obtained both the German BaFin and UK FCA licences, the founders joked that it would be their Brexit hedge, before knowing that Brexit would actually happen. The service is currently available to clients in Germany, Austria and the UK with plans to expand in Europe and eventually worldwide. According to Simon Miller, UK COO, from day one they knew that they needed to be multi-custodian, multi-regulator, multi-currency and multi-language. Building this into their operational model from the very beginning was challenging, but it certainly gave the company a competitive edge when it came to flexibility in moving across different jurisdictions.
Scalable is a young business, but with a highly experienced team which is heavily skewed towards financial engineering and technology (they have 9 PhDs in econometrics and machine learning!). After being operational for only a year and half, the company had already acquired 4000 clients, with an average investment of £40k. While Scalable's early adopters (and their current target clients) are mostly tech-savvy, well-paid, 40+ year-old professionals, already experienced in investing, the founders believe that their service has potential to be suitable to a much wider audience. This is mainly due to the user-friendly, engaging and cost-efficient design of their service.
Compared to many investment managers that offer either expensive customised service with hand-picked investments, or access to “pick yourself” platforms where clients can select their funds, Scalable has decided to offer a different experience by taking away the pain of making decisions and managing investments. First, they understand how much risk the client is prepared to take, and then they offer an end-to-end fiduciary service all the way through to investing and on-going management of the portfolio within agreed risk levels.
According to Ella Rabener, the CMO of Scalable, their service appeals to experienced investors who clearly understand Scalable’s business model and could probably manage their own investments, but do not have time or desire to do so. They also don’t want to be taken for a ride by a service provider and are looking for a service that can manage their investments in a truly intelligent way.
In addition, Scalable’s approach appeals to other, less sophisticated and/or risk-averse investors who just don’t feel confident enough in making investment decisions. The company will do this for them and in a way that gives clients a very controlled investment process, with a risk management process that minimises volatility. In particular Ella stressed that Scalable’s service would be perfect for women, who compared to men, still shy away from investing.
The flexibility and cost-effectiveness of the service is achieved not only through technology, but also the choice of investment vehicles. If you want to build clients customised, globally diversified, low cost, highly liquid and very transparent portfolios, you need look no further than Exchange Traded Funds (ETFs). Compared to mutual funds, ETFs are very flexible as you can trade them in and out every day. Nonetheless, even actively traded funds are not the best vehicle as they are very expensive and often underperform the market. According to founders, Scalable stay completely independent from issuers in their analysis and selection of the best ETFs for their clients.
Using ETFs is not quite the same thing as investing directly into underlying assets, but it is certainly operationally convenient tool for a lot of retail investors who are not concerned with the dividends or stock lending activity.
Where Scalable Capital differentiates itself from traditional asset managers is in the fact that they don’t so much offer a product but a service. Their portfolio management service includes a sophisticated and highly automated risk management system. The founders decided to move on from the usual (and often meaningless) high/medium/low risk classification, and introduce more quantifiable and easily understandable “risk percentages”, based on a VaR (Value at Risk) concept. A scale of 3% to 25% indicates how much a client is prepared to loose in a really bad year, thus helping them make more accurate decision about their risk appetite. The portfolio is then managed at this constant risk level agreed with the client, and the risk-reward profile is graphically displayed to the client with 5 and 30 years projection at any point in time.
Keeping risk constant is another intentional deviation from traditional asset management. Each individual portfolio is assessed on a daily basis and adjusted to reduce or increase risk depending on the current market situation.
This approach is agnostic to the weights between asset classes (i.e. equity to bond ratio), being more concerned with the risk in the portfolio at any particular point of time. Interestingly, such a service had previously only been available only to large sovereign wealth funds. Investment Banks would run this analysis on their mainframe computers - now Scalable can use the power of cloud computing to scale it up for the benefit of tens of thousands of retail customers.
While some experts might be concerned that automated investing (often referred to as robo-advisng) might contribute to systemic risk, caused by algorithms moving markets in the same direction, the evidence so far shows completely the opposite result. With sharp market movements, people tend to behave impulsively, remove their investment and wait until markets improve. However, by keeping the risk constant, this behaviour is eliminated because the portfolio does not undergo these sharp movements. Thus investors stay invested longer without further aggravating the situation in the markets.
The intensive use of technology and a new digital operating model takes a lot of risk away, but new risks enter. As an FCA-regulated business, Scalable Capital has to adhere to the same rules and codes of conduct as any other authorised firm, whether related to trading requirements, client on-boarding, management of client accounts, etc. And this requires completely new skill-sets for compliance, legal and other control functions. There are no shortcuts for smaller companies in terms of regulation, but this is by no means reflected in the customer experience.
Compared to many tech start-ups, Scalable Capital is slightly unusual: they have not taken advantage of popular incubator/accelerator services, but instead have opted for an experienced team. Initially funded by the founder’s funds, they were quickly able to raise angel investment, then followed by €11m of venture capital money. They have achieved 100m AUM in their first year of operations, and are aiming to achieve multiple times of this number in the second year. According to Ella Rabener, Scalable is not far from becoming profitable – potentially with the next round of funding. In a world where many technology companies attract huge investment just on pure “potential” and receive massively inflated valuations before anyone can see any revenue, this is an achievement.
In the short term, Scalable is focussing on growing and improving its existing retail business and developing B2B services. For instance, last year they entered into a partnership with Siemens in Germany, where they power the financial products for their employee benefits programme. They will also work on developing partnerships with banks, advisors and bigger private wealth managers who might want to leverage their technology in order to reach out to the mass retail market.
The founders of Scalable also talked about their ambitious views for the future, where they see themselves as a leading personal financial advisor across multiple jurisdictions, offering anything from tax optimisation and social investing services to overall wealth optimisation and customised financial advice based on personal lifecycle.
The Payments Services Directive 2 (PSD 2), which comes into force in 2018, is viewed as a ground-breaking development in the WealthTech market. Seeing the transactional data of clients and building up a picture of their overall wealth would enable the development of much more engaging and relevant services.
In future we will see further application of Artificial Intelligence (AI) and Machine Learning (ML) in Finance, where complicated algorithms, learnt independently by machines, will help people with financial planning.
While we are seeing a huge explosion of FinTech startups, many might not last. On the other hand Scalable Capital, with its focus on great customer experience, the development of scalable smart technologies and solid business acumen of their founders, is definitely here to stay.
To find out more about Scalable Capital services go to https://uk.scalable.capital
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