Nutmeg is a new online investment tool based in the UK that is injecting spice into the retail investment market and makes managing your investment portfolio as easy as pie. It was founded in 2011 by a team of former City (London) investment managers. The web-based discretionary investment management company provides similar services to those offered by Wealthfront and SigFig, but offers more choice and agility when determining the composition of your portfolio.
The main selling point of Nutmeg is its transparency and flexibility. If you are currently using a discretionary manager or a financial advisor, the lower fees of Nutmeg could help you save a lot of money in management costs.
How Does Nutmeg Work?
After you sign up and link your accounts, Nutmeg determines the type of investor you are based on your tolerance to risk. Nutmeg’s software then divides your savings into a range of funds determined by 10 scenarios with different levels of risk.
Although the funds Nutmeg chooses and how much of your savings it invests is an automated process, the pool of funds available are determined by human investment managers who are constantly looking for undervalued funds. This provides an attractive balance between the low-cost and high-efficiency of automated investment allocation and the flexibility and insight of human investors.
The Pros of Nutmeg
Nutmeg makes investing with a discretionary manager easier, more transparent, and cheaper. Its user interface is simple and intuitive to use, and Nutmeg is not scared of publishing its portfolio performance, something few competitors do.
This portfolio performance graph allows you to compare Nutmeg’s results to those of its competitors (the average results of discretionary investment managers published by Asset Risk Consultants) and of the market as a whole. http://www.nutmeg.com/how-we-invest#portfolio-performance
Nutmeg outperforms the average results of its competitors at all risk levels. One of the reasons for this is that regular investment managers charge higher fees, which eats away at the profits they generate by investing your money.
Nutmeg’s pricing model is simple. You get charged a fee between 1.0% and 0.3% based on how much money you invest. If you invest £1,000, you pay an annual 1% fee (£375 a year, £7.21 a week). If you invest £50,000, the rate goes down to 0.75% and anyone investing more than £500,000 is charged 0.3%.
The Downsides of Nutmeg
Nutmeg has only been around for a couple of years. Although its results are encouraging, it’s still too soon to be able to make significant comparisons with other discretionary managers.
Nutmeg is cheaper than other discretionary managers but more expensive than other automated investment services or Vanguard’s target date funds (around 0.30%). For example, Wealthfront charges a 0.40% fee, regardless of how much you invest; SigFig charges a flat $10 a month fee; and Betterment charges from 0.35% to 0.15% depending on how much you invest.
However, Nutmeg is available to anybody over 18 years of age, regardless of whether they live in the UK or not. Automated investment services in the United States are restricted to those who have a US social security number or tax ID number and a permanent mailing address.
Nevertheless, the added cost of Nutmeg doesn’t seem to translate in higher returns. The same portfolio return graph mention above also shows that Nutmeg falls behind the market in all risk levels, even after accounting for fees. If these figures are typical, and Nutmeg seems to want you to think so, you would have been better off investing in an index fund that tracked the market, which also would have incurred in lower fees.
In a Nut(meg)shell
Although Nutmeg is more expensive than other automated investment services, it also offers a more hands-on involvement by investment managers. This doesn’t seem to have provided much of a benefit to investors when compared to those who chose low-cost index funds, but it does explain the additional cost.
Nutmeg provides a hybrid investment tool that combines discretionary investing managers with automated investment software. It’s a great deal for those interested in a discretionary investment manager but also want to spend less of their profits on management fees.
Find more Nutmeg reviews here.