We’ve gotten to know each other pretty well, haven’t we? I feel like we can be honest with each other. For instance: I don't care for that shirt. See? And we're still friends. In the spirit of that honesty, let's talk about Wealthsimple’s fees. If fees are indeed the enemy of investment growth, as you've told me, why pay any?
Here's the thing. We charge a fee. We're as transparent as possible about it: you pay 0.5%; that goes down to 0.4% for Wealthsimple Black clients who have invested at least $100,000 with us. You also pay the small fee that's built into the ETFs we purchase for you — about 0.2%. Statistically, those are very small fees for the kind of sophisticated wealth management we deliver. But it's not nothing. And we want people to understand exactly what that fee gets them.
The first thing you get when we invest your money is a very efficient, very sophisticated portfolio that's personalized for your needs — how old you are, what you're saving for, when you'll need the money, your tolerance for risk. We spend a great deal of time and energy building next-generation portfolios using ETFs that are perfectly diversified. Our investment team and advisory committee are made up of some of the most respected investors and math wizards in the world. If you like fancy finance jargon — the Black Litterman model and mean variance technique and asset classes that provide exposure to diverse sources of beta — we've got plenty of that. But the bottom line is: we think these portfolios are the perfect way to invest.
But can't anyone buy those ETFs? Can't I just buy the same ETFs you do and have pretty much no fees?
Sure. You absolutely could. But first you'd have to calculate the perfect balance of those funds for you and then buy that balance. But the harder part is maintaining that balance.
One of the services we provide for all accounts is something called automatic portfolio rebalancing. The principle is simple. When we design a portfolio, we put your money into different kinds of investments based on how risky they are, what kinds of companies and countries the investments are comprised of, etc. That's called your asset allocation, it's precise, and it's different for different types of clients. But as the markets go up or down, the value of your investments change and pretty soon your portfolio doesn't meet the allocation we designed for you. If you're supposed to have 20% of your money in American stocks, for instance, but the market goes up, then those stocks will represent more than 20% of your investment. That's not optimal, so we’ll exchange investments that have become overrepresented for the ones that have become underrepresented. Without having to do a thing or spend a dime, you’ll essentially be buying low and selling high.
Rebalancing a portfolio on your own is about as much fun as trying to assemble an Ikea Fjälkinge shelving system with nary a #10001 Allen wrench.
OK. That does sound kind of worth it. What other fancy terms can I throw around when people ask me what Wealthsimple is doing for me behind the scenes in exchange for that 0.5%?
We do something called dividend reinvestment, which means we put your dividends right back to work for you so they can earn even more money without you having to make a decision or lift a finger. And there's tax-loss harvesting. Here's how that works: sometimes when the value of an investment goes down, it makes sense to sell that investment so you can use the losses to offset taxes; then we buy you a similar investment so that you can take advantage when the market goes back up. That happens automatically.
But what if I need help figuring out how much to invest? Or how much risk I should take on? What if I need some advice that doesn't come from a really pretty app? Do you guys make me talk to a robot?
I feel like you're giving me softballs here, Andrew. Yes, with that fee, you get unfettered, free, all-you-like telephone advice from our team of Portfolio Managers. Each member of that team is registered as a Portfolio Manager — that means they have a certification in giving the kinds of advice they'll be giving. And all our Portfolio Managers have backgrounds managing the investments of high net worth clients. They have the kind of vast financial planning experience to ensure our clients are set up with portfolios aligned to their goals, and know all the totally-legal tricks to make sure you’re not paying a penny more than you need to be in taxes.
And they're also very nice and friendly and don't use language only accountants understand.
But wait. If those other guys charge 1% or more, don't they more than make up for it with higher returns?
No. A lot of the places with "higher returns" use what are called actively managed funds — like mutual funds. Active funds have historically failed to outperform the broader market. Over the past decade, the returns on 83% of actively managed funds in the US have failed to beat the broader market. That's a failure of such proportions that Warren Buffett recently lamented that investors who decided to use active funds have essentially flushed $100 billion in fees down the toilet in the past ten years. That's why we use exchange traded funds, or ETFs, which are part of our philosophy of passive investing.
How come I don't get any presents? Where are the free toasters that people get when they open bank accounts?
We are pretty frugal here. We'd rather charge less in fees than spend our clients' money on gifts to our clients that they wouldn't have bought for themselves.
But once you reach Wealthsimple Black status, not only will your fees be smaller, but we do have a couple fancy perks for you.
Ok. But how much am I really paying you? I want to know.
If you'd have invested $50,000 with us in a standard Growth portfolio on January 31, 2017, you'd have paid us $300 in fees by now. Around $250 goes to Wealthsimple for our services, and $50 goes toward paying the fees for the ETFs themselves. Not a huge number, but it's real money. Think of it as a round-trip ticket to Cleveland (depending on where you live!). On the other hand, in that standard Growth portfolio, your gains over that period would have been $5,193. And the hours you'd have spent managing your money, buying and selling ETFs, rebalancing your portfolio, doing tax-loss harvesting, reinvesting your dividends, and other exciting financial maintenance would have been exactly zero.
We think that's a bargain — and a much much better deal than either paying a big bank more, or doing it yourself. If we didn't, we wouldn't have started the company. If you don't agree, well, that trip to Cleveland awaits.
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