For most simple folks, the world of investing and managing money is opaque. It is filled with arduous undertaking of applications and understanding financial jargon.
In this edition of Startup Dives, I will be covering Wealthsimple - a Toronto based startup that is on a mission to build the world's most human financial company. They have consistently been named as a top Canadian startup and have also been christened as one of the most innovative companies of 2019 by Fast Company in 2019. Also, they are one of the few companies still hiring during COVID.
Origin Story
Wealthsimple was founded in September 2014 by Michael Katchen, Rudy Adler and Brett Huneycutt in Toronto. As of August 2019, the firm holds over C$5 billion in assets under management from 175k+ customers. They have raised $265M+ in 7 funding rounds. That’s the kind of growth that comes with a combination of strong product, solid marketing and good luck.
Prior to founding Wealthsimple, Michael worked for 1000Memories, a Silicon Valley-based startup which was bought by Ancestry.com in 2012. This is when Michael developed a spreadsheet with tips to help his current cofounders (Rudy and Brett) set up investment portfolios. This spreadsheet was the MVP and version 1 of Wealthsimple. Read Michael’s story in his own words here (it’s really interesting!). Michael describes his mission as below:
To completely democratize wealth. To see access to financial freedom as a human right for everyone no matter where you come from or how much money you have. We want to enable everyone to achieve financial freedom. Financial freedom can be one of the greatest forces for good in the world. It enables people to live the lives they want, to provide for their loved ones, and to invest in their communities.
So, what is the business?
Wealthsimple’s core product is a robo-advisor geared towards millennial clients to help them invest. They are however building an ecosystem of simple to use products that cater to all your financial needs:
Wealthsimple Invest (core product)
Wealthsimple Trade (commission free trading accounts)
Simple Tax (Online tax filing software)
Wealthsimple Cash (save and spend) - 50% live with ‘save’ - the card that can be used to spend is still in the pipeline
What do they really do and how do they make money on Wealthsimple Invest?
Let’s say you have $1000 to invest and you open an account with Wealthsimple. Wealthsimple charges a 0.5% investment fee (0.4% on $100k+ investments) on your investment i.e. $5.
So for $5 they would invest your $1000 in a globally diversified portfolio of low-cost index funds. They would also do automatic rebalancing of your portfolio and dividend reinvestment for you. Essentially you put in your money and forget. That is robo-advising at its core. They invest your money across the entire stock market using Exchange Traded Funds (ETFs). And also let you choose a risk level that you're comfortable with to build a portfolio based on your financial goals. When you invest the same $1000 with your bank, you typically pay higher fees and banks usually coax you to invest in mutual funds that further increase your costs without any real evidence of higher rewards in the future.
I would have to write a separate post altogether to unpack what does ‘globally diversified portfolio of low-cost index funds’ mean. If you are interested read here to learn about index funds.
How do they make money on Wealthsimple Trade?
Wealthsimple Trade lets you buy and sell stocks and exchange-traded funds (ETFs) on major Canadian and U.S. exchanges without charging any commission fees that are typically associated with stock brokerages. They make money on currency exchanges for US trades through a currency exchange fee of + 1.5%. Their income is therefore dependent on the volume of US trades. I suspect they would hardly be making any money on ‘Trade’ at this point unless they come up with premium plans in the future.
How do they make money on Simple Tax?
Wealthsimple acquired tax software company Simpletax in September 2019. It’s Wealthsimple’s first foray outside of saving and investing but aligns well with their goal of providing solutions to improve overall financial health of their customers. If you are a WS customer, you no longer have to leave the WS family to do your taxes. Here’s what Simple tax says about their pricing:
After you submit your return to the CRA, we'll ask if you'd like to support SimpleTax. You can pay what you want, including zero. While we hope you'll support us if you can afford it, the choice is yours.
That’s actually what it is. You pay what you believe the service is worth. Pretty insane right? Here’s what some Reddit users have to say about it. I suspect that they are likely making less money than what they could have with a fixed fee structure as observed with many pay as you want restaurants. Read here and here. However, they are definitely gaining ardent followers who would talk about their software to anybody and everybody that they know of. Only WS knows how much revenue is the service generating though.
How do they make money on Cash?
Cash will be a hybrid saving and spending account. Currently only 50% of the product is live where you can save your money. It started with an interest rate of 2.4% but is now down to 0.9% due to the interest rate cuts by The Bank of Canada. Wealthsimple Cash Card will let you spend this money similar to a debit card and that’s when WS will be able to make some money on the interchange. For now, they wouldn’t be making anything on the savings. Again, this is an attempt to keep WS users within WS’s ecosystem of products for all their financial needs and a bet on the long term financial viability of large enough volume of transactions leading to large interchange fees.
What’s the Competition like?
Now, when you know the product, let’s understand the competition. Wealthsimple plays in a very competitive world. In fact each of their products play in a super competitive field of their own.
WS Invest - Big Banks, other robo-advisors and robo-advisor units of big banks. The Big Five are its opponents. In addition to that Canada also has several other robo-advisors such as WealthBar and Nest Wealth. However, so far none of them has reached the status of Wealthsimple. Then there are leading US companies such as Betterment that may at some point decide to move up north. BMO has its own robo-advisor SmartFolio, RBC has Investease. These are in addition to the large infrastructure investments that the banks have in their investing divisions with thousands of portfolio managers and the army of financial advisers that sell mutual funds and bank’s investing instruments to existing and new clients.
WS Trade - Brokerage units of Big Banks and QuestTrade. Again banks have always acted as brokerage firms through their subsidiaries and are slowly making adjustments in the form of lower trading fees to fend off WS Trade.
WS Cash - Big Banks and new fin-tech startups. While Cash is a hybrid account, it is directly competing both traditional savings and checking accounts at the bank as well as new fin-tech companies such as Revolut that are after the exact same market.
Simpletax - Tax software firms such as Intuit and H&R Block. Intuit’s Turbotax and H&R Block’s brick and mortar units along with online tax software are direct competitors of Simpletax. These companies with 100% focus on taxes will do everything to keep Simpletax away from taking their market share. The big advantage for Simpletax would be direct access to all WS clients though.
What’s exciting about Wealthsimple?
Unique voice to target a specific customer : WS has carved a niche by reaching out to millennial investors. Wealthsimple has a cool factor for a customer who has adopted technology but is clueless about investing. Here’s what CPA Canada has to say about WS: They have targeted financially illiterate millennials who feel guilty because they know they should invest but don’t. And there are a lot of them: 53 percent of Ontarians between the ages of 18 and 36, for instance, have no investments. Why not? They’re intimidated, they’re paying off debt first, they don’t think they have enough money or, in the era of Uber and Airbnb and Instacart, they don’t have the patience for in-person appointments and piles of paperwork. WS’s product and voice resonates with its customers which has led to the growth that it has seen.
Really Simple Product : Signing up for a Wealthsimple account is refreshingly painless. You answer a few questions in a format that seems like talking to a friend over Whatsapp and you are all set. You share your bank details which WS flows through Plaid to your bank to connect with your account and you can start investing with as little as you want without maintaining any account minimums. Best part is that you don’t have to speak with anyone to get going. The language has no jargon and is plain for anyone to understand. Both the website and the app have minimal distraction and intuitive design. I believe the simplicity of WS’s product is a differentiator in itself. They have even built some add-ons to get their customers to invest more such as round-up. It allows you to round up your purchase from say $27 to $30 where the last $3 will be invested by WS. They are also amongst the few services that provide social responsible investing and halal (sharia-compliant) investing to those customers who want to follow specific principles while making investments.
Lower Costs : WS has much lower costs than a traditional advisor. They don’t have to manage any front offices to host clients. In fact for the most part they don’t even need resources to talk to clients.
Building an ecosystem : The Simpletax acquisition and Cash card are long term investments geared towards making an eco-system of all types of financial services that a consumer needs. This sort of thinking is best explained by the founder himself in his own words - "Taxes are so ingrained in our lives, and like most financial services, the process of filing them is inherently complicated, challenging and expensive. We have admired SimpleTax for years. They are doing what Wealthsimple did for investing by making tax filing easy, accessible and affordable. By bringing SimpleTax into the Wealthsimple family, we're one step closer to simplifying people's financial journey over their lifetime." Having an eco-system that the consumer never leaves will maximize customer’s lifetime value for Wealthsimple and is therefore a strategy that will help Wealthsimple in the long run.
What makes me nervous about Wealthsimple’s future?
Not much. I am pretty bullish on them. That said this is a fiercely competitive market and there are two muscles that Wealthsimple will have to build to reach its potential:
Ability to reach and keep higher end customers : So far, WS has gotten first time millennial investors to trust them and invest with them. Firms make the most money when they manage assets of large investors. What will happen when a millennial investor’s portfolio increases to a significant enough size where they seriously start considering moving to a 100+ year old establishment? We don’t yet know and there is no public data to speak of WS’s ability to convince HNIs to invest with them. I believe this would be a key issue for WS and while they have a product for investors with deposits over $500k+, it is hard to know the mix of such clients in WS’s 175k+ total customers.
Ability to cope up with a bear market : We are going through uneasy times and this is the first time when WS investors will see their portfolios shrink. Will this scare them to withdraw and close accounts or will WS’s communication strategy of letting their clients stay put work? Only time will tell.
Additional Resources
That’s all for now :)
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