When fixed brokerage rates got decimated by the double whammy of deregulation and digitization, banks and brokers sought refuge in Assets Under Management (AUM) fees. You can understand why, it is a lovely repeat business, with great revenue visibility and low churn. So it is no surprise that lots of digital disrupters are following Jeff Bezos line about:

 “Your fat margin is my opportunity.”

Nutmeg caught my eye for three reasons:

1. They recently did a Series B and for all the talk of a Series A Crunch, it is at Series B that you have to show serious traction. I am not privy to what traction Nutmeg has, but having done a Series B means they probably do have a lot of traction.

2. I was seeing lot of billboard ads around London for Nutmeg. I tend to be skeptical about advertising to build a brand (maintaining a brand is different). However, in this case the revenue should be sticky and they are up against household names, so advertising makes sense.

3. I love nutmeg; I put it on my oatmeal and French toast. That does pose a branding challenge when you Google Nutmeg; unless you add some qualifier like financial or money, you end up on cooking sites.

The AUM business is a three-layer stack:

• Top of the stack.This is where most of the digital disrupters play. At the high end, this is called Wealth Management; this is where Private Banks and Multi-Family Offices operate. The middle market is all about investing employee pension funds and other tax-advantaged savings plans (such as 401K plans in America and ISA in UK).

• Middle of the stack: passive-but-specialist ETF index funds. This is the enabler for the layer above. You could not do this with Mutual Funds. You can buy and sell ETFs as easily as a stock and they do “tax loss harvesting”. The fact that you can assemble a portfolio at low cost using ETFs is the enabler. This is like MS Windows enabling Office. The risk – as with all stacks – is that a big player at this layer (such as Vanguard or Blackrock) could move into the layer above; there are already some signs that this is happening.

• Bottom of the stack. Custodians. This is also an enabler for innovation. The overriding lesson from the Madoff scandal was “don’t trust anybody who is self-custodizing”. The reason is simple; they can simply lie about what the assets are worth. A new brand – whether it is Nutmeg or Wealthfront – can simply say “the assets are stored at Big Global Custodian X, we never have access to them”. That helps build trust, which is the critical thing when it comes to money.

There are many “winner-takes-all” markets where network effects rule; all marketplaces tend in this direction. The AUM business is not one of them. Today there are thousands of companies operating at the top of the stack. This will probably also be true in the digital-first world. There will eventually be consolidation and that will benefit all the startup founders and investors in this space.

One company that looks like the “Gorilla” (in Crossing The Chasm speak) is Wealthfront. They grew to $1 billion in AUM in about 2 years. That shows how wide open this market is. There is room for Nutmeg to do the same, even within the “small” UK market.

“Bits don’t stop at borders, but money has to show its passport.”

Wealthfront is in America, Nutmeg is in the UK. With a few minutes on Google you can find “national alternatives” in just about every country. The mix of regulation and consumer risk aversion when it comes to money favors a well-funded local player.

Eventually, many of these national players may be acquired by a big global AUM player. That could Wealthfront. Or it could be Schwab. To put that $1 billion from Wealthfront into perspective, Schwab has $22.3 trillion in AUM. Yes that is t for trillion. Or to normalize that it is $22,300 billion. You cannot buy Wealthfront or Nutmeg stock today, but you can buy Schwab stock.