Robo-Advisory Moves Should Boost RBS’s Profits

RBS: Royal Bank of Scotland Group logo
RBS
Royal Bank of Scotland Group

In a bid to make the most of the rapidly growing robo-advisory industry, The Royal Bank of Scotland Group (NYSE:RBS) has begun offering its customers robo-advisory services through its NatWest Invest platform. While the robo-advisory industry in the U.K. has dominant players like Scalable Capital (in which BlackRock acquired a minority stake this June), MoneyFarm and Nutmeg, RBS is the first major bank in the country to offer these services. RBS’s ability to push the new platform among existing retail banking customers, and the fact that other U.K. banks have yet to jump onto the robo-advisory bandwagon, should give RBS a distinct advantage relative to incumbents, who are all independent companies. Notably, the fee revenues from NatWest Invest will be split between the bank’s retail banking operations (which provides the investment platform) and its asset management operations (which will be the investment manager).

We are currently in the process of updating our $7.50 price estimate for RBS’s stock, which is slightly ahead of the current market price.

See our full analysis for RBS’s stock

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Over recent years, the global asset management industry has seen a secular shift, with actively-managed funds gradually falling out of favor as low-cost exchange-traded funds (ETFs) grow at unprecedented rates. The success of ETFs can be attributed primarily to their popularity among retail investors. The retail investing market remains extremely under-served despite accounting for roughly 30% of all investable assets worldwide. This is because retail investors are generally very sensitive to fund expense ratios, and the low-cost, convenience and transparency afforded by ETFs turned out to be an ideal fit for their investment needs. The meteoric rise in popularity of ETFs, in turn, also led to the proliferation of robo-advisory services. While traditional wealth managers remain the primary distribution channels for most investors, robo-advisory has seen rapid growth over recent years because of the retail investment segment. The trend is easily explained by the fact that robo-advisory platforms are simple to use, and usually have a simple, low-cost fee structure.

Notably, while banks in the U.S. embraced the robo-advisory channel for offering investment services to their customers fairly early, banks in U.K. have largely remained on the sidelines as they shied away from the investment advisory industry after they had to shell out millions in legal expenses and costumer redressals since 2011 for giving improper investment advice to customers. This includes their mis-selling of Payment Protection Insurance (PPI) as well as interest-rate derivative products to retail investments for years before regulators stepped in with stricter laws governing investment advisory services.

As banks have the ability to cross-sell their products to existing customers – an advantage individual robo-advisors don’t enjoy – RBS’s decision to embrace robo-advisory services through its NatWest Invest platform will give it a huge advantage in the industry. As the minimum investment requirement for NatWest Invest is just £500 with monthly contributions of £50, and as fees for the entire service are capped at 0.95% of funds for a year, the service is clearly targeted at the mass retail market. We believe that RBS’s incremental operating costs for offering these services will be much lower than the potentially large revenues the new platform should generate. This will help reduce operating expenses for RBS’s retail banking arm as a percentage of revenues going forward.

At the same time, investments through NatWest Invest will be managed by RBS Asset Management (Dublin) Limited and Coutts & Co – subsidiaries of the RBS parent company. As the 0.95% expense ratio for the service includes an annual platform fee of 0.35% and an annual fund-related charge of 0.60%, RBS’s private banking arm should also reap the benefits of increased adoption in the form of growing assets under management and fee revenues.

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