Changing the face of financial services is clearly the goal at Scalable Capital, and one can easily sense the excitement after a chat with its co-founders in their brand new office, geared for growth, in the City.
The company was launched in Germany in 2015 and in the UK last year with a mission to make investment more accessible to those who cannot afford a private bank’s services.
After gathering €125 million (£108 million) of assets in their first 12 months of running the business, co-founders Adam French, Ella Rabener and Simon Miller are not just enthusiastic about what 2017 will bring, but also feel their concept is resonating with people.
Rabener, describing the proposition as occupying a ‘new category of financial services’, says Scalable is a technology firm with data at its core.
‘What we wanted to do was basically help to innovate not just the way investment management is delivered, putting it online and making it more convenient, but really trying to change the product itself,’ French adds.
‘What we’ve seen as part of the first wave of digital investment managers is a change of the customer journey, but you still have the same service that you had years ago. We are using technology to use a risk-targeted approach to asset allocation.’
They describe the proposition as a ‘full fiduciary service’ where clients only need to select a risk category and the firm does the rest on a discretionary basis.
The average client is 43 years old and has €45,000 invested. Two thirds of their clients are from the banking or technology world.
When clients first register with Scalable they fill out a suitability survey, like with any other firm, but instead of getting placed in a low, medium or high risk bucket – which French describes as ‘arbitrary labels’ – they get a percentage from 3% to 25%, which indicates the potential loss in a very bad year.
The portfolios have a dynamic asset allocation approach which moves the weights over time in response to how risk is changing in the market. The algorithm they use runs tens of thousands of simulations using raw asset class data to build a projection of how they are expected to move in the future. But instead of rebalancing based on a pre-determined equity and bond split, the portfolios are rebalanced purely based on risk.
French explains: ‘As a result of that, the risk in the portfolio remains constant through time. And the weights move. Whereas in the other world, 60-40 equity bond split, the weight stays constant but the risk changes massively.
‘Most people have a set risk tolerance. By making these dynamic adjustments to keep the risk constant, it enables us to keep clients invested as long as possible and keep them comfortable.’
For the risk categories of 15%, 20% and 25% the portfolio returns were in the range of 19% to 22% over the 12 months to 31 December 2016. Although a direct comparison is difficult, the IA Mixed Investment 20%-60% sector average return was 10.76% over the same period.
Picking up the pace of client acquisition following its summer 2016 launch in the UK, the company says it is attracting €2-4 million a week. It is now targeting several hundreds of millions in AUM over the next year.
The company raised £8.8 million in two fundraisings in 2015 and 2016 with a third one planned this year. The company’s latest accounts for the year ending December 2015, show it made a £215,000 loss, although the UK operation was not live in this period and it remains early days.
The German business was set up by Erik Podzuweit, Florian Prucker and French, in mid-2015. They later recruited Rabener, who worked with Podzuweit at their former employer, retail specialist Westwing and Miller.
The original team quickly grew to 45, more than half of which work in the engineering team.
The co-founders said they wanted to create a crossborder service right off the bat because they were looking to build a business than can be scaled across Europe easily.
‘It really made us think about the complexities from day one. Think about a solution where we have different currencies, different custodian banks, KYC providers and different languages, and have that approach built into our DNA pays massive dividends over the long term,’ French says.
‘When you think about being able to expand, when you think of a feature for one country, we always think how we can leverage that for all the other countries. Just having that allows you to be way more efficient. That kind of approach helps us to scale.’
The decision to apply for dual regulatory permissions makes even more sense now with Brexit creating uncertainties around many companies' operations.
‘When we set the business up we all joked and said it was our Brexit hedge, but now it’s less of a joke,’ French says.
‘But for a small firm like ours it offers an opportunity. Many big incumbents now have to deal with huge regulatory issues in terms of how they dissolve their integrated financial institution across mainland Europe and the UK. We don’t need to deal with those issue. While they’re spending millions of pounds trying to refactor their business we can spend that money on growing our business. You always have to see the silver lining with these things.’
Rabener adds that it opens up opportunities with potential business partners, pointing out that they could easily plug into Scalable’s systems and decide what modules of the service they want to use.
‘There are many ways we can cooperate with them. In terms of the investment universe, they can take our algorithm exactly the same or if they have a philosophy they want us to implement we can do that. That opens a lot of doors that some of the other players can’t walk through,’ French says.
Now that services in both countries are fully operational, the team is considering other opportunities.
Rabener and French believe it would be relatively easy to launch in another country and they are exploring parts of Europe including Switzerland, France, Northern Italy and the Netherlands. Scalable is already passported into Austria through the German business.
In the long run they see Asia and the US as a big opportunity for growth as well. Some might argue the US is already a crowded market with Betterment and Wealthfront leading the robo-advice industry, but Rabener argues that Scalable can still offer something different.
‘We wouldn’t be a “me too” player entering the market. I think we really have something to offer that is one level more sophisticated than the plain vanilla approach. It is not as algorithm-and-data driven as what we are doing, they are still dealing with more traditional concepts,’ she says.
Meanwhile on the B2B side, the duo say they have a number of requests from banks, asset managers, insurance companies and brokers asking how they can utilise some or all of what Scalable has to offer to build a digital proposition.
In the UK, the agenda for this year is to get a Sipp offering up and running which will mean the firm finally has a full product suite.
‘We want people to understand they have access to a fully managed service now. This is a new category of financial services,’ Rabener adds.