How to get affordable world-class Investment Management

How to get affordable world-class Investment Management

Update: 26/03/19 – Scalable Capital are now my core pension manager – Join Scalable Capital here (referral code – we both get £50) for more on my investments, particularly ethical impact investing, go to Quality Abundance.

What is the back story?

I first met some of the founders of Scalable Capital at the 2015 Web Summit in Dublin. I was intrigued by the concept and have been tracking their progress. I had been on the look out for a something similar to their product offering for a while. I had enviously investigated Wealthfront and Betterment in the United States.

So in 2016 I attended one of their “Investment Summits”, which well obviously intended to promote their product, is more about educating the market. UK investors typically prefer qualitative measures like Morningstar ratings, which seldom in my experience have been any real predictor of success.

I was excited, Scalable Capital looked like the best thing to happen to Investment Management since the advent of low cost index funds by Vanguard. Revolutionary, not like the storming of the gates of parliament, but revolutionary nonetheless.

For all the hype there are usually only four things, in my view, the Average Joe investor can do to increase their return and reduce their risk:

  1. Start investing early – Generally reduces risk & increases return – Assuming 7% return, every 10 years you wait, you could literally halve your wealth at retirement, thanks to the power of compound interest. (Note investing, not speculating)
  2. Reduce taxes and fees – Increases returns – Taxes can be reduced most easily through pensions and ISAs. Fees can be reduced through investing in passive index funds (probably more likely to outperform active funds anyway). So for every 1% fee reduction you could increase your return by 50% (7% return and 40 yrs investment).
  3. Diversification across asset classes and assets within each class -Reduces risk – Nobody knows what will do well and what we do know is generally priced in.
  4. Re-balancing – Generally increases return & reduces risk – As risk should be priced in to return. Simplistically re-balancing is buying low, selling high. Where I personally get a bit lazy is the re-balancing part. I did a simulation once based on a 10 year period and actual returns in the bond and the share markets. Simple annual re-balancing would have given me 12% increase in returns with a significant decrease in volatility of earnings.

So what is the key differences between Scalable Capital and existing services?

Between active managers – Active managers attempt to (often badly) pick investments that will do well, Scalable Capital focuses on managing risk, instead of return. Richard Branson, who is synonymous with risk taking and adventure, is the first to say “How do I protect my downside?”, he famously started Virgin Atlantic with an option to return the planes a year later if it was a flop. Risk taking, maybe, risk management, definitely. Of course the “Ultimate Risk Manager” doesn’t sound as cool.

Between a robo-advisor – The media seems to love this term. I don’t. Perhaps because of the mental image it conjures up . More eloquently Scalable Capital is a digital investment platform. While the “Robo” part may be evident in how it re-balances portfolios, their fund selection process appears robust and certainly includes key subjective elements.

Between lifestyle funds – I personally am not a fan of lifestyle funds. Lumping people with different risk profiles (10 years covers a lot) and then paying someone to manage funds (where I am paying someone else). Scalable Capital’s service is individually personalised. So personalised that if I invested today £10k and invested £10k next week, it would select a different portfolio composition. This seemingly minor point may not mean much to a lot of people, but this is indeed significant particularly in volatile environment of Brexit. It also shows the attention to detail and deep understanding evident in their investment approach

Between DIY – I have been a buy and hold diversified funds strategist to date through my preferred provide TD Direct. For example in the Vanguard Lifestrategy funds. Scalable Capital has a dedicated team of analysts selecting the most efficient and representative ETFs available. While there are no guarantees, I dedicate a few hours every quarter, with a lower skill level and data available to selecting funds, they have a team constantly identifying the most suitable funds.

But, does it meet my criteria for investing?

  1. Start investing early – That’s up to you.
  2. Reduce taxes and fees – ~1% all in fee, seems great value. ISA gives the Tax efficiency and I am eagerly awaiting the pension option to be made available later this year (2016).
  3. Diversification -Yip, globally diversified according to your risk tolerance.
  4. Re-balancing – For sure, dynamically re-balanced and the key for me, is that it is based on risk, not return.As above, the laziness comes in re-balancing. It would be great if DIY platforms built this in. Scalable Capital does this roughly weekly.

What was it I didn’t like?

What I didn’t like was the £10k minimum investment. Few people in my network would be able to invest this amount. Unless they had an ISA or a pension to transfer, but this was not an option initially. I am a campaigner for the “Average Joe” investor and I asked their UK CEO and Co-Founder about it. He explained it was to do with the way the risk diversification worked, they wanted to ensure that their diversification could be optimised. But with more data and refinement, this has now changed, they have been able to lower the £10k to £5k, as well as open the ISA account. This becomes a lot more feasible, with a large segment of people earning marginally more than inflation on their cash ISA, it is attractive indeed.

Will they be a success and is this the platform for you?

Early signs indicate they are poised for exponential growth and for good reason. I myself have transferred my Investment ISA and will be transferring my Pensions when that option becomes available. I understand the next steps for them for be to optimise tax efficiency, but this will mostly be of interest to High Net Worth individuals. For the Average Joe, utilising and maximising use of ISAs and Pensions should be sufficient.

I have had conversations with 5-6 staff members at Scalable Capital and each has a very different back story. But when I asked why they were joined, I half expected the reason to be because of the growth expected (i.e. money), instead everyone replied with different versions of “I was looking for this product”. So many gave up high flying corporate careers to pursue the aspiration of transforming the market, make it better, more abundant. This is something I can get behind.

I have no idea if they are right for you personally, as it will depend on your circumstances. For me it ticks the right boxes and I no longer need to be envious of the options available in the United States.


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