Wealthsimple: East Meets West

The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

Simplifying Wealth

With more than C$3 billion in assets under management (AUM) and 100,000 clients, Wealthsimple is a leading player in the robo-advisory industry. The firm offers individuals passive wealth management services in the U.S., the U.K., and Canada.

Passively investing through an index fund is hardly a new innovation, tracing back to 1976 when John Bogle opened the first fund at Vanguard. The most recent wave of this trend began in 2008 in the U.S. with robo-advisory firms like Betterment and Wealthfront, who have since accumulated approximately $14 billion and $11 billion in AUM, respectively.

While the advantages of passive investing are welldocumented, incumbents are being forced to expand their current product offerings in a bid to capture and retain clients. Wealthfront, for example, now offers a line of credit alongside its robo-advisory services. While the robo-advisory business may not yet be saturated, this trend implies that incumbents are facing difficulty in convincing consumers to adopt their products. The result is a much smaller obtainable market for robo-advisory relative to the total addressable market for asset management services. In such market conditions, incumbents can only attempt to differentiate what is a largely generic product—passive investing at low fees—with customer experience, branding, and a reliance on consumer loyalty.

To date, Wealthsimple has introduced a number of product expansions to accomplish just that. Wealthsimple has followed U.S. incumbents’ decisions to introduce ancillary products such as savings accounts. These tools were presumably created to introduce the company to customers in hopes of building a relationship that could lead to cross-selling its investment service. In addition, Wealthsimple has proactively created new investment products to appeal to market niches with its Halal and Socially Responsible investment portfolios. It has also attempted to reduce traditional frictions in investing by automating the processes of investing consumers’ spare change (Roundup) and surplus bank balances (Overflow), features which better enable consumers to save. Lastly, the company has expanded to international markets to fuel faster growth, launching a U.S. expansion in January 2017 and entering the U.K. later that same year.

While these initiatives have increased the platform’s accessibility and functionality, these different expansion vectors by Wealthsimple raise the question: why is Wealthsimple not instead focusing on increasing its penetration in the company’s existing markets?

Is the Piggy Bank Full?

Wealthsimple has hardly dented the overall $37-trillion North American asset management market, managing more than C$3 billion in total assets. Many consumers have an aversion to robo-advisory services and within the part of the market comfortable with the idea of a robo-advisor, competition is fierce due to the presence of incumbent robo-advisors and banks.

Another factor limiting the size of Wealthsimple’s target market is a misalignment between clients inquiring about the company’s products and the clients’ investment requirements. As Wealthsimple’s communications director Rachael Factor stated, the robo-advisory service is sometimes not appropriate for would-be clients given their time horizon and the nature of the investment. With competitive incumbents in new markets and difficulties in consumer willingness to adopt Wealthsimple’s products, the future of Wealthsimple’s growth is in flux.

The Growth Question

By considering the following combination of events, a new narrative around Wealthsimple’s dissatisfactory growth is constructed:

– Wealthsimple conducted its expansion into the U.K. very soon after the U.S., certainly before a full penetration of the U.S. would have been possible. This is particularly illustrative of the poor market conditions given that Wealthsimple’s larger U.S. peers have not opted to look at other geographies.

– Wealthsimple has suffered from an inability to directly apply its strategies from Canada to the U.S. because of differing market dynamics. In the U.S., the headwind of heavy student loans has made investing less feasible for individuals under the age of 35. In response, Wealthsimple has shifted its focus towards an older demographic.

– Wealthsimple has been consistent in its expansion into niche products. The company first introduced Socially Responsible Investing in May 2016. Just over one year later, Halal Investing was introduced in a continuous attempt to appeal to specific consumer preferences.

The company’s continuous efforts to grow its addressable market and the magnitude of the obstacles that have arisen in each market have made it clear that current growth initiatives are insufficient.

Wealthsimple’s Options

Wealthsimple has several options to ensure its business grows into the future. The first is continuing with its current strategy, building out alternative channels like Wealthsimple for Advisors and expanding the offered services to capture a larger portion of financial advisors’ back-end expenses. The risks with this option are largely structural: the incumbent banks offer similar products and mandate affiliated advisors to use their offerings.

Wealthsimple could also choose to actively invest in consumer awareness and marketing of the benefits to passive investing in an effort to promote Wealthsimple’s products. This option carries the same risk wherein newly informed individuals may still opt for a more established brand such as the “Big Five” Canadian banks, which are entering this market and have the benefit of significant public trust.

The last option is to expand its services to a new geography that is currently not served or underserved by roboadvisors. This option carries the risk that Wealthsimple could overextend its resources trying to expand the business globally while attempting to maintain its focus on its core market. However, in markets where robo-advisory is still a nascent industry, this approach allows for efficient growth due to low competition. If combined with the right demographics, it could enable Wealthsimple to scale its business and capture untapped “blue ocean” markets.

Provided appropriate execution, the third option provides Wealthsimple the highest measure of control over its fortune in an industry so reliant on consumer perception and with large incumbents competing at every turn. Of all international markets, the ideal opportunity for expansion can be found in India.

The Indian Robo-Advisory Opportunity

The market opportunity for robo-advisory in India is significant due to four major themes:

– A culture of savings is entrenched among Indians. While private savings are significant, historically accounting for 30 per cent of GDP, they have historically been in illiquid or unproductive assets including real estate and gold, limiting the exposure of Indian households to asset classes like the equity markets. This trend has slowly started to shift since 2016 as a result of demonetisation, the Indian government’s decision to invalidate all 500 and 1,000 rupee notes in an attempt to dramatically suppress illicit and counterfeit cash in the economy. With increased trust in the financial systems, Indian households responded by channeling their unproductive assets into formal saving mechanisms such as mutual funds.

– Demonetisation was a key catalyst leading to an increase in trust in technology-based processes for finance among Indians. This led to a massive shift towards cashless transactions like credit/debit and an expansion of the formal economy. This has also been the impetus for some individuals to skip directly to digital financial services, leapfrogging traditional services like physical credit cards.

– There is a confluence of demographic trends that gives India a large base of individuals with investable assets—a key tailwind for robo-advisors. India is projected to have the largest middle class in the world by 2027 and its number of high disposable income households has increased twentyfold since 1990.

– This industry now enjoys broad regulatory support. The Securities and Exchange Board of India clarified in 2016 that an advisory service using automated tools is perfectly acceptable provided the service follow compliance rules and conduct client risk profiling, key capabilities that Wealthsimple already possesses. Additionally, a foreign asset manager can enter the market and invest in Indian securities provided they do not repatriate shares. Repatriation of shares would not present any issue as Wealthsimple would not remove funds invested for Indian clients from India.

Opportunity for Wealthsimple

Given pressures from incumbents like Wealthfront in the U.S. and new entrants like the Canadian banks, Wealthsimple would be well-served to seize a compelling blue ocean opportunity like the one that India offers. Secular trends demonstrate that the Indian market is ready for a robo-advisors with a large untapped obtainable market, unlike Western economies where the immediately obtainable market has already been saturated. This is particularly enhanced by the lack of a pure-play competitor in the Indian market.

Client Fit

Wealthsimple’s target clients want “a smarter and simpler way to invest their savings” and “don’t have the required assets to hire traditional advisors.” India represents a relatively unsophisticated market with respect to financial literacy. The current breadth of investment products offered to the average Indian is overwhelming. Products like Systematic Investment Plans, mutual funds, Public Provident Funds, Reserve Bank of India taxable bonds, and Equity-Linked Savings Schemes are difficult for the layperson to analyze to determine the ideal portfolio for their needs. Wealthsimple’s value proposition would be to provide greater accessibility to a larger set of the population than the existing convoluted schemes. Wealthsimple also has an advantage over these products in that its focus on mobile investing is particularly targeted towards millennials and other individuals with a high degree of tech savviness.

Picking the Right India

While India is one country, it is a bastion of diversity with 22 officially recognized languages and six unique regions. Executing in this market requires a carefully considered strategy that accounts for regional and linguistic norms.

Some best practices with respect to Indian expansion include the ability to localize the business and offer products with decreased functionality and technical requirements. A “Wealthsimple Lite” would mirror big tech peers’ product introductions such as Uber Lite and would
better match technical limitations in India. This version should focus on the core product and progressively roll out new features as the company gains traction; features like Roundup or Overflow would likely overwhelm the uninitiated consumer.

A targeted launch in a few major Indian metropolitan areas that have some regional similarities would enable Wealthsimple to gain traction while minimizing its execution risk by limiting the likelihood of cultural missteps. A possible set of cities includes Mumbai, Hyderabad, Chennai, and Pune; all are large cities with sizeable English-speaking populations and of relative affluence in India.

Going for Gold

With no clear option to spur growth for Wealthsimple given its existing operations and the ripening of India as a market ready for robo-advisory services, Wealthsimple should aggressively position itself to capture the lion’s share of the market. With a recognizable brand, positive customer associations, and an easy-to-use platform, Wealthsimple would be a welcome addition to the Indian wealth management landscape.

If Wealthsimple does not seize this opportunity, any future expansion plans will repeat its experience in the U.S., where a local incumbent has gained too much market awareness to topple. There may never be a profitable second place, so Wealthsimple must actively go for gold.