Wealthsimple: Teaching Tomorrow's Investors
By: Ariana Ghavami & Timothy Ma
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
From Rags to Riches
Wealthsimple Inc. is a Canada-based online investment management company designed for novice investors. Since its inception in 2014, the platform has grown significantly. Today, Wealthsimple holds C$16.9 billion assets under management (AUM) divided under five services: Wealthsimple Invest, Wealthsimple Trade, Wealthsimple Cash, Wealthsimple Crypto, and Wealthsimple Tax. Each product delivers services reflecting its namesake; Wealthsimple Invest offers a variety of robo advisors and Wealthsimple Trade allows investors to purchase securities from a selection of Canadian and U.S.-Based stock exchanges. Each of Wealthsimple’s products generates revenue from its user base with a variety of strategies ranging from optional donations to account management fees and per transaction fees. Of Wealthsimple’s products, Wealthsimple Trade and Wealthsimple Crypto are expected to generate the most revenue as both business models benefit from high trading volumes.
Wealthsimple Trade disrupted the Canadian trading environment as the first to offer users the capability to invest stocks and ETFs on a no-commission basis. Wealthsimple is able to offer commission free trading, no account minimums, no monthly fees, and fractional share purchases through charging a 1.5 percent currency conversion fee when purchasing or selling US stocks. Wealthsimple Trade further appeals to its 85.0 percent millennial user base through its positioning as a non-traditional financial institution. Through policies including no account minimums and fast, contactless setup, Wealthsimple Trade created a platform that prompts low-pressure investment exploration to attract investors with limited experience.
Stock Between a Rock and a Hard Place
Investment management platforms rely on consistently growing assets under management (AUM) for sustainable growth - Wealthsimple is no different. Contrary to a traditional financial institution, Wealthsimple Trade’s exclusion of monthly fees renders it exclusively dependent on trade volume and frequency for revenue generation. Despite total clients (excluding tax clients) across Canada growing from 1.2 million to 1.7 million YTD, the platform has seen a significant 14.8 percent quarterly decline in its AUM. The decline in AUM reflects a decrease in trading volume amidst low investor sentiment. With no monthly fees to incentivize trading, a bad market hurts Wealthsimple's top line growth.
Further emphasising Wealthsimple’s current stagnation is the rapid growth rate of the online investment management industry. The global online investment management industry is expected to grow to $4.4 billion by 2028, an increase that is represented by a 14.4 percent CAGR. Within Canada, the industry is relatively fragmented with a sizable list of established investing companies. Despite the fragmented industry, it is difficult for new players to compete and scale their businesses due to the dominant market share that the four biggest Canadian online investment companies currently have. These industry incumbents benefit from scale and brand recognition, two barriers of entry that they must diligently defend to maintain its position. Starting off as one of those new entrants in 2014, Wealthsimple rapidly grew a name for itself in the Canadian market for its freemium business model and its beginner friendly, education-centred platform. Since that meteoric rise, the company’s growth has stalled while the industry continues to see steady growth.
Picking the Right 'Stock-ing' Stuffer
Within the last year, Wealthsimple has outgrown the previous industry leaders in TD Direct Investing and RBC Direct Investing. Driven primarily by the large number of new investors interested in starting their careers as investors, Wealthsimple’s no-fee account and learning modules drew the attention of these individuals. Currently holding ~30.0 percent of the entire online investment management industry, Wealthsimple sits comfortably above TD Direct Investing (the previous industry lead) with it capturing 20.7 percent of the market. Although this spread creates a cushion for Wealthsimple’s current slowdown in growth, if not addressed within the next year, the company’s position as an industry leader will be in jeopardy.
Case Study Commercial Investing:
Wealthsimple’s two biggest competitors, RBC Direct Investing and TD Direct Investing, are derivative platforms founded by well-established commercial banks in the Canadian financial services industry. Despite being similar in its core product offering, these institutions have a drastically different approach to revenue generation when compared with Wealthsimple. Where Wealthsimple operates under a ‘freemium’, zero-fees, business model, if their accounts are under a certain size. These platforms make money off of a flat fee charged for purchasing and selling investment products.
Finding Unrealized Upside
The current capital markets have yet to recover from the mass equity sell offs during the summer months and has led beginner investors to shy away from equity investing. Although the market volatility affects all investment platforms, the unfamiliarity of newer investors with recessionary periods has left a greater impact on Wealthsimple – what was once a beacon of growth for the company might be one of the core causes of its decline.
To best address the external risks associated with the volatility in the capital market, Wealthsimple needs to educate its customers on how to capitalise on market uncertainty. Instead of changing its business model to match that of RBC and TD – commercial banks that have deeper budgets and resources – Wealthsimple should focus on its core mission statement of education.
The Little App That Beats the Market
Wealthsimple’s target clientele are young, beginner investors interested in learning more about the stock market – a client base that makes educational institutions such as universities a strong fit for the company. With the majority of Canadian university students turning 18, the legal age to invest in the stock market, by the time they start first-year, many of these aspiring investors are scouting for platforms to enable their passion for investing. Having access to a fresh group of investors, the educational background of post-secondary institutions fits well with Wealthsimple’s mission statement of providing new investors educational tools to learn more about the public markets. Wealthsimple’s freemium model creates a low-cost entry point for students unsure about investing and those driven to become strong investors. What has once limited Wealthsimple in times of weak investor sentiment can prove to be the platforms’ greatest asset.
With Wealthsimple’s recent rise to popularity, the platform needs to add credibility to its brand. The best way to approach this would be a partnership between external, post-secondary level educational content such as Khan Academy, Coursera, or Forage. These platforms have both more than sufficient personnel, resources, and reputation to provide education to university students. From holding financial modelling seminars at universities to online valuation lessons on the company’s platform, Wealthsimple can grow its credibility within the next generation of driven inventors.
Investing in a Brighter Future
Wealthsimple has an existing presence in Canadian post-secondary institutions including Waterloo University, Wilfrid Laurier University, Queen’s University, and Western University, as a result of its Wordle Wednesday promotional campaign at the start of 2022. Though the campaign centred around Wealthsimple’s Cash platform, the initiative familiarised thousands of students across Ontario with the Wealthsimple name – a valuable jumping off point for future initiatives. Capitalising on pre-existing brand awareness is a crucial first step for Wealthsimple to introduce its Trade platform to prospective young investors. Similar to its Wealthsimple Cash on-campus initiatives, the company should designate campus investor ambassadors to promote Wealthsimple’s educational offerings within extra curricular groups that focus on finance, investing and the capital markets. Ideally, this network of ambassadors is established near the start of the academic year to provide a long runway for promotions and conversations around the platform. Once these ambassadors are established, they should be provided educational resources, access one of the aforementioned educational platforms, and encouraged to distribute them. In the latter half of the term Wealthsimple should host a cross university stock pitch competition. Hosting a competition of this nature would encourage learners on the platform to independently research and form an opinion on a stock, thereby connecting their learning with a realistic investment decision. The winners of the competition would then be rewarded with a monetary prize that is redeemable on the Wealthsimple Trade platform to encourage winners to invest in their learning outcome, kickstarting their journey on the platform.
A strategic investment in the developing the knowledge of young investors should bring both strategic and monetary value to Wealthsimple. Through supporting young investors at the beginning of their journeys, Wealthsimple should be able to achieve its mission statement of “help[ing] everyone achieve financial freedom, no matter who they are or how much they have,” while also driving investment volume and increased earnings.
