This is the latest installment of our “Ask Wealthsimple” series, where our CEO Europe Toby Triebel helps you navigate the world of investing.
I don’t completely understand what Wealthsimple is. So let’s start with: What do you guys do?
It's pretty simple. We're a digital 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 — signing up and building a personalised portfolio should take about five minutes. You sign up online, answer a few questions that will help us assess 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 passive funds optimised for your situation. We manage those investments for you as well, rebalancing your account to make sure you stay perfectly diversified as the value of your investments change. Human touch is really important to us, so we have a team of investment advisers 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 what's called a passive approach to investing. Which means that you, the investor, help determine an investment profile for yourself — do you want to be in riskier investments that could give you a higher return or is stability more important for your goals? — then we invest your money in the right mix of assets and you watch as your investments grow with the broader market. Why do we believe this is the best way to do it? The vast majority of research shows that hiring someone to pick stocks, which is what a an actively managed 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 investments 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.” What does that mean? Do you have robots?
“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 human beings, not robots. Some people equate the term “robo-advisors” with high-frequency or 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 far more effective than having a human being picking stocks. We think of ourselves as the perfect combination of people and technology. The algorithms behind our trading philosophy are designed by really smart human beings. And the technology takes over and removes all the biases that human behaviour 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 passive funds. I read that Warren Buffett said that after he dies, he wants his heirs to invest in passive funds 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. In the UK alone, investors pay on average 2.56% in fees for financial advice and investment management. In comparison, passive funds track at a way lower cost. 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 passive funds. Our fees are based on how much you've invested with us. Here's how it lays out:
0.7% fee for accounts up to £100,000
0.5% fee for accounts above £100,000
Underlying portfolio charge of 0.14% - 0.32%
So what’s the difference if I pay 2.56% or .87%? Neither number sounds particularly bone-chilling.
The difference may seem small now, but over time the savings compound. A percentage or two difference in fees easily adds up to hundreds of thousands of pounds by the time you’re ready to retire. That could not only change your retirement date, but whether you can retire at all.
If I spent some time building my own portfolio using passive funds, couldn't I pay even lower fees than having you do it?
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 funds? 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.
An investment adviser 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 minimise 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 adviser will protect your downside. But there have been plenty of studies done showing that over 80% of active managers have failed to outperform broad market indices over a 10-year period. You’d better be damn sure your adviser is in that other 20%. 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 plan to be around for decades to come.
That reminds me, tech companies aren’t exactly famous for their longevity. If Wealthsimple goes out of business, 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. When you invest with Wealthsimple, your assets are held by SEI Investments (Europe) Ltd., Wealthsimple's UK custodial broker. They look after $468 billion of client assets (as of 2016) and are regulated by the FCA in the UK. Also, you've got the Financial Services Compensation Scheme 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.) By using technology to simplify the investment process we're able to reduce the overhead costs that traditional financial institutions typically have.
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 the world of traditional financial institutions, in fact. I think that the high-net-worth planning divisions within the banks are pretty good. Unfortunately you need more than £500,000 in assets to qualify to use them.
If I give you my money, are you going to be calling 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.
All investing should be considered long-term. While stock markets have typically trended upwards over the long term, your investments can go up and down, and you may get back less than you invest.
Wealthsimple uses technology and smart, friendly humans to help you grow and manage your money.