This is the latest installment of our “Ask Wealthsimple" series, where our financial guru Dave Nugent helps you navigate the world of investing.
I still don’t really understand what Wealthsimple is. So let’s start with: What the heck do you do?
It's pretty simple. We're an online investment manager. We help people build smart portfolios and we give them advice about how to achieve their financial goals — whether that's saving to buy a home, paying down debt, or investing for retirement. One of our innovations is that we've made the process incredibly easy — it should take about five minutes. You sign up online, answer a few questions that will help us figure out the best investment strategy for you — how soon you will need your money, your tolerance for risk, etc. Then you transfer money into your new Wealthsimple account, and we use that money to buy a diversified mix of low-fee ETFs optimized for your situation. We manage those investments for you as well, reinvesting to make sure you stay optimally diversified as the value of your investments changes. Human touch is really important to us, so we have a team of advisors who can walk you through it all over the phone, if that’s more appealing than doing it online.
Does the company have a general philosophy when it comes to investing?
Yes, we advocate a passive approach to investing. Which means that you, the investor, set an asset mix—do you want to be in riskier investments that could give you a higher return or is stability more important for your goals?—and then watch as your investments grow with the broader market. The vast majority of research shows that hiring someone to pick stocks, which is what a mutual fund does, is not only more expensive (that person collects a management fee) but less effective than buying funds that track entire sectors of the market. We can get more into this later if you want.
But while you’re being passive, Wealthsimple does some work for you: As your assets change in value, we automatically rebalance your portfolio. For example, say we've designed a portfolio that keeps 10% of your money invested in emerging market stocks and the prices of those stocks go down. You'd end up with less than 10% of your portfolio in emerging market stocks. So, periodically, Wealthsimple would rebalance the portfolio, in this case buying more emerging market stocks and selling the sectors that have become overrepresented.
I’ve seen you described as a “robo advisor.” Do you have robots? How many are there? Are they bent on destroying humanity? I’m suspicious.
“Robo-advisor” is a term that was coined by the U.S. media to describe an investment strategy with minimal human interaction. We don't love the term at Wealthsimple, because we're people. Some people equate the term “robo-advisors” with flash trading because they've read the Michael Lewis book Flash Boys— that has nothing to do with the nature of our business. At the same time, we do use technology to help build your portfolio because, historically, it's way more effective than having a human being picking stocks. We think of ourselves as combining the human element with technology. The algorithms behind our trading philosophy are designed by really smart human beings. And then the technology takes over and removes all the biases that human behavior can bring in. We design the system based on what works, and then we automate the decisions because computers can keep a much cooler head than humans can when money is involved. Emotion is the enemy of smart investing.
And of course we also have humans to speak with when you want to, whether you’d like to change your investment goals or just ask a question.
So there are no Wealthsimple robots? Not even like one cute robot who everyone likes and thinks of as a friend?
I promise there's no robot.
OK. You guys invest in ETFs. And I read recently that Warren Buffett said that after he dies, he wants his heirs to invest in ETFs to avoid the “frictional” costs of active investment. What’s he talking about?
When he says frictional costs, he’s talking about the fees you pay to have funds actively managed. An ETF that tracks the S&P 500 for example, charges about .05% in expenses. That’s pretty cheap. On the other hand, the fee at the average mutual fund in Canada is about 2.5%. Buffett also noted that active investing doesn't give you a better return.
So let's be transparent. Exactly what are the fees at Wealthsimple?
We keep our fees very low because we only invest in ETFs. Our fees are based on how much you've invested with us. Here's how it lays out:
- 0.5% fee for accounts up to $100,000
- 0.4% fee for accounts above $100,000
So what’s the difference if I pay 2.5% or .5%? Neither number sounds particularly bone-chilling.
The difference may seem small now, but as your portfolio gets bigger, and time passes, the savings start to compound. By the time he or she retires, the average Canadian could end up paying about $300,000 more in fees if he or she opts to pay for active investing. That could make the difference in whether you can retire a couple years early—or retire at all.
If I spent some time building my own portfolio using ETFs, couldn't I pay even lower fees?
Absolutely. It comes down to how you want to spend your time, and how confident you are in your financial skills. Ask yourself these three questions: Do I feel like I don’t need any help with financial planning and building the perfect portfolio of ETFs? Do I want to be responsible for rebalancing my account? Do I want to be responsible for making tough decisions when the markets are going down? If the answer to any one of those is a maybe, then we're probably a solution you should look at.
A financial advisor once told me everybody’s happy with passive investment when the market’s on the rise, but when the market’s in free fall, I’d be glad he’s there to minimize the downside.
The number-one sales pitch for “active investing”—people who believe that they can pick stocks or sectors that will outperform the broad market index—is that an advisor will protect your downside. But there have been plenty of studies done showing that 75% to 80% of active managers have failed to outperform broad market indices over a 10-year period. You’d better be damn sure your advisor is in that other 20% to 25%. Which is of course impossible to know.
When I think of tech companies, I think of head-spinning burn rates, off-the-hook parties. Are you going to be using my money to get Kanye to play the Wealthsimple Christmas party?
That sounds fun, but no. We're a finance company, and we're in the business of money management. So prudent spending is very important to us. We even wrote about it. We plan to be around for decades to come.
Yeah, speaking of that, tech companies aren’t exactly famous for their longevity. If you guys bite it for any reason, is my money going to disappear with you?
No. Every account is actually held in your name, so if something were to happen to us, the account would still be there. We don’t hold your assets. And you’ve also got the Canadian Investor Protection Fund as a backup.
But how are you guys going to get rich if you are charging so little in fees?
We think we’re going to attract a lot of people who understand how much more they'll pay by using a lot of the big players in the financial industry. (And a lot of people who simply enjoy using Wealthsimple more than any other financial tool.) At a traditional bank, 50% of the fees you’re paying go toward advisors’ sales commissions. We don’t think those salesmen are earning that money. Our advisors receive bonuses based only upon our clients’ feedback. Plus traditional investment firms typically have a huge back office, people pushing paper whose salaries you pay in the form of fees. Part of our business strategy is to not pay for a lot of the unnecessary things big banks pay for.
So is part of this about the fact that big banks are terrible?
I don't believe that you have to invest with us because you think banks are bad. I came from Royal Bank of Canada in fact. I think that the high-net-worth planning divisions within the banks are pretty good. Unfortunately you need a million dollars in assets to qualify to use them.
If I give you my money, are you going to be bugging me every five minutes?
If you want to speak to us, we welcome that, and we’re easy to get on the phone. Otherwise, all of the investing and portfolio-rebalancing and all the other good financial stuff is automated. Just set it and forget it. Though you can keep an eye on your balance as much as you want—hopefully it'll be getting bigger.
Wealthsimple makes smart investing simple and affordable.