Every startup has an origin story, a story that illustrates its fundamental principles. For Wealthsimple, this meant promoting low-cost passive investments.

After selling his first business a decade ago, Wealthsimple co-founder Michael Katchen built a simple portfolio of exchange-traded funds using Microsoft Excel and then told friends he had been working with. cashed out that this approach was the best way to invest their money.

The underlying premise: It’s hard to outperform the market over the long term, so for most people it’s best to invest in a mix of low-cost ETFs and ride the wave.

“The comments I got from my friends were, ‘Mike, we’re lazy. We love the system, but can you just do it for us? “Mr. Katchen told The Globe and Mail in 2016.” And they became Wealthsimple’s top 10 clients. “

The concept has proven popular with the Millennial crowd, attracting billions of dollars in assets to Wealthsimple’s so-called robo-adviser, and the company has gone so far as to buy Super Bowl commercials preaching “a simple automated investment ”. In no time at all, Wealthsimple got so much buzz that people started to wonder if it would take the old guard off Bay Street.

Lately, a lot of it seems to be a past life. The company’s automated platform still exists, but Wealthsimple is now promoting a trading app for retail investors. And it’s not just about stocks – he’s heavily promoting his new cryptocurrency business, which allows users to trade a host of crypto assets.

The new strategy seems at odds with the founding principles of Wealthsimple, especially with crypto, which is very volatile and has some of the highest trading fees. In a recent speech, Gary Gensler, the new head of the United States Securities and Exchange Commission, called the Wild West crypto market “filled with fraud, scams and abuse.” China recently made all crypto transactions illegal.

Despite the hard pivot, Wealthsimple has said little about their change of mind. When asked about the new strategy, no one wanted to be interviewed. Instead, the company sent emails explaining that it was branching out to target different customer segments.

“Our mission is to help everyone achieve financial freedom, no matter who they are or how much they have. This mission has not changed. We are a fast growing company that is building a complete financial ecosystem for our clients through their savings, investment, spending, tax and crypto needs, ”Mr. Katchen wrote.

As for the volatility of crypto, which prompted the SEC chairman to call it a “highly speculative asset class,” Katchen doesn’t think that disqualifies it from inclusion in a well-balanced portfolio. Wealthsimple, he writes, is “very comfortable recommending that our clients place their money in diverse, low-cost portfolios, while supporting them if they wish to invest in particular companies or promising new technologies.” . He also said that Wealthsimple is the first crypto platform to be regulated by a securities regulator in Canada.

What happens at Wealthsimple is the same in the robo-advisor industry. Once popular rivals in the United States, including Wealthfront and Betterment, face their own existential crises. For all the billions of dollars robo-advisers manage, that’s often not enough to generate a profit. The CEO of Betterment resigned last December and its new leader admitted that an initial public offering was probably not possible until the company started making money.

“These companies operate with very tight margins. They just have extremely low fees, so they have to scale up enough before they are profitable, ”said David Goldstone, head of research and analysis at Backend Benchmarking, which tracks the robo-advisor market, in an interview.

Even though a robo-advisor generates tens of millions of dollars in revenue per year by charging around 0.5% per year, the business has to spend a lot to attract new clients. “There was an industry-wide underestimation of the cost of customer acquisition,” added Mr. Goldstone.

To compound the problem, the old guard woke up and launched their own robot advisers. In the United States, Vanguard and Charles Schwab now dominate the market, with assets worth $ 210 billion and $ 60 billion, respectively, at the end of 2020. Betterment, the largest independent robo-advisor in the United States, managed 28-USD. billion on the same date. In Canada, the Bank of Montreal launched its SmartFolio robo-advisor in 2016, and the Royal Bank of Canada followed suit in 2018.

Incumbents are not just more competitive – they have a structural advantage, as they can sell their robo-platforms to existing customers, thereby reducing their customer acquisition costs.

To adapt, Wealthsimple began to diversify in 2018 with a high interest savings account, then added Wealthsimple Trade, which allows users to buy and sell stocks. In the fall of 2019, the company acquired software maker Simpletax. And a few months later, she launched Wealthsimple Cash, a hybrid of a no-fee chequing account and a high-interest savings account.

The pivot to crypto began in August 2020, when Wealthsimple users were allowed to start trading Bitcoin and Ether. Last June, trading expanded to 14 additional crypto assets, including Litecoin and Dogecoin.

Wealthsimple doesn’t break down its assets by division, but retail and crypto are what make Silicon Valley salivate. Last fall, Wealthsimple raised $ 114 million in a funding round that valued the company at $ 1.4 billion. In May, it raised an additional $ 750 million, bringing its valuation to $ 5 billion just seven months later.

The Robinhood retail app and crypto trading hub Coinbase recently went public in the United States, and their financials illustrate how explosive retail revenue growth can be, especially in crypto. . At Robinhood, the crypto grossed US $ 320 million in the first half of 2021, compared to just US $ 10 million in the first half of 2020.

To understand what this could mean for Wealthsimple, just check out the fee schedule. The company’s bot clients often pay 0.5% per year, while crypto traders pay 1.5% to 2% per transaction. (although Wealthsimple must share these costs with other parties).

Equity trading and crypto are also popular with younger users, which has always been Wealthsimple’s target market, but has proven to be a difficult problem to solve.

Even though the company attracted billions in assets, it represented only a tiny fraction of the total wealth management market. Conversion rates, which measure how likely a person is to be willing to leave their main financial institution, remain stubbornly low. In 2020, management consulting firm Accenture set the rate of change for a primary financial account in Canada at just 4%.

Yet, as the business grows, it seems inevitable that it will drift away from its roots – some of which are still on display on the Wealthsimple website. In a section promoting its robo-adviser, the company writes, “History shows that when you try to predict the future – by picking stocks, for example – rather than investing in a very diverse way, you are more likely to underperform the market. “

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