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Why Wealthsimple and robo-advisers aren’t scaring Bay Street anymore

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  • Feb 14th, 2020 3:23 pm
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Why Wealthsimple and robo-advisers aren’t scaring Bay Street anymore

As I mentioned in another post a while back, it's going to be a very long road until Wealthsimple can gather enough assets even to break even, if it even ever happens, as there just enough assets available that want a robo. Likely they'll have to merge with their main investor, Power Financial.

The Globe: Why Wealthsimple and robo-advisers aren’t scaring Bay Street anymore
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I like the concept of no commission trading started in Canada, backed by Power Financials that also owns Investor Group. I would hazard to guess that WealthSimple does not have to make money for quite a while as long as the concept attracts more asset under management (AUM) away from from other brokerage firms.
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cchenzz wrote: I like the concept of no commission trading started in Canada, backed by Power Financials that also owns Investor Group. I would hazard to guess that WealthSimple does not have to make money for quite a while as long as the concept attracts more asset under management (AUM) away from from other brokerage firms.
As the article points out WS only takes in $2.5M/mos in revenue and is losing money. Their ad budget is almost $2M/mos yet growth in assets, now a total of $6B, has slowed significantly. Clients have an average of $30K invested and it takes over 7 years for WS to break even on that, let alone make money. The question is how long Power Financial and Allianz X, their 2 investors, who along with the original investors have invested a combined $338M in WS, $100M of which was invested in 2019, are willing to lose money month-after-month until break-even happens. I doubt they will keep suffering the losses. As it stands now it make be another decade until they even break even and during that time $100's of millions more will have to be invested to keep the WS ship afloat. This with the big banks, who have captives audiences of tens of millions of clients, also now getting into the robo game to make it even worse for WS.

Michael Katchen, the CEO of WS, said in 2017 that the funds offered by the big banks are a 'rip-off'. Actually for anyone who has actually compared, they will see that WS is actually the rip-off compared to Vanguard Canada. Forget WS's fancy smartphone app and website, which only dazzles the easily swayed. They do nothing to increase the value of your portfolio. Go with Vanguard Canada. The annual savings in fees over WS will amount to a small fortune in your pocket over the years. Also, at least Vanguard makes money instead of losing it hand over fist, which Vanguard then uses to further reduce annual fees, something they have been doing for almost 50 years now.
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eonibm wrote: As the article points out WS only takes in $2.5M/mos in revenue and is losing money. Their ad budget is almost $2M/mos yet growth in assets, now a total of $6B, has slowed significantly. Clients have an average of $30K invested and it takes over 7 years for WS to break even on that, let alone make money. The question is how long Power Financial and Allianz X, their 2 investors, who along with the original investors have invested a combined $338M in WS, $100M of which was invested in 2019, are willing to lose money month-after-month until break-even happens. I doubt they will keep suffering the losses. As it stands now it make be another decade until they even break even and during that time $100's of millions more will have to be invested to keep the WS ship afloat. This with the big banks, who have captives audiences of tens of millions of clients, also now getting into the robo game to make it even worse for WS.

Michael Katchen, the CEO of WS, said in 2017 that the funds offered by the big banks are a 'rip-off'. Actually for anyone who has actually compared, they will see that WS is actually the rip-off compared to Vanguard Canada. Forget WS's fancy smartphone app and website, which only dazzles the easily swayed. They do nothing to increase the value of your portfolio. Go with Vanguard Canada. The annual savings in fees over WS will amount to a small fortune in your pocket over the years. Also, at least Vanguard makes money instead of losing it hand over fist, which Vanguard then uses to further reduce annual fees, something they have been doing for almost 50 years now.
I don’t disagree with the stats so far. WS is losing money year after year so far and asset per client average is low or lower. However, my portfolio is in stocks only for the last ten years so Vanguard Funds ( though I admired them and would recommend their low fee etfs without hesitation) do not apply in my case or perhaps others who hold only stocks. NO trade cost and good online platform for frequent stock traders are good things that will shift the balance in WS’s favour. No trading fee for someone who trades 20 times a month or more is attractive, I would say. Of course, no telling how long the backers of WS will keep funding it. Though for Power Financials, proof of concept - no trading fee - is worth the investment without disrupting its existing investment service arm like IG.
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Opinion

could it be that Michael (whats in it for me) Katchen is all about that.

funded by Power Financial & AllianzX, I'm sensing from the G&M article that WS will have a short life for the reason the big boss at Power Financial putting the squeeze on WS performance, "Mr. Desmarais III asking Michael 'where is the return on the hundreds of million that we invested in you & WS"?

How long can a company lose money & continue to be propped up with funding?

would you put your money in WS?

what is his background, success & failures?

https://www.cpacanada.ca/en/news/pivot- ... boy-wonder

I can see Katchen leaving WS (another failure) with his pockets lined & loaded (that was a nice payback using OPM), off to start another venture.

what was Michael Katchen personal investment in WS?

what is Michael Katchen salary/benefits package?

what is Michael Katchen personal net worth?

.
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cchenzz wrote: I don’t disagree with the stats so far. WS is losing money year after year so far and asset per client average is low or lower. However, my portfolio is in stocks only for the last ten years so Vanguard Funds ( though I admired them and would recommend their low fee etfs without hesitation) do not apply in my case or perhaps others who hold only stocks. NO trade cost and good online platform for frequent stock traders are good things that will shift the balance in WS’s favour. No trading fee for someone who trades 20 times a month or more is attractive, I would say. Of course, no telling how long the backers of WS will keep funding it. Though for Power Financials, proof of concept - no trading fee - is worth the investment without disrupting its existing investment service arm like IG.
Perhaps the balance will shift in WS's favour for those who do not want to pay trading fees to hold individual stocks, which I think is what you are referring to rather than index funds which also hold only stocks. The problem is that those who want to hold individual stocks vs having their money actively managed by others, in index funds or have their stocks traded and held at the major brokerage is such an infinitesmally small fraction of 1% of the marketplace that it amounts to a rounding error. More significantly, though, is that WS does not make any revenue on those clients who hold individual stocks so it is impossible for that segment of the market to have any effect on WS's revenues and profit.

Since WS started offering no trading fee all that has happened is their growth has slowed down even further.
Last edited by eonibm on Feb 9th, 2020 10:07 am, edited 2 times in total.
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porticoman wrote: Opinion

could it be that Michael (whats in it for me) Katchen is all about that.

funded by Power Financial & AllianzX, I'm sensing from the G&M article that WS will have a short life for the reason the big boss at Power Financial putting the squeeze on WS performance, "Mr. Desmarais III asking Michael 'where is the return on the hundreds of million that we invested in you & WS"?

How long can a company lose money & continue to be propped up with funding?

would you put your money in WS?

what is his background, success & failures?

https://www.cpacanada.ca/en/news/pivot- ... boy-wonder

I can see Katchen leaving WS (another failure) with his pockets lined & loaded (that was a nice payback using OPM), off to start another venture.

what was Michael Katchen personal investment in WS?

what is Michael Katchen salary/benefits package?

what is Michael Katchen personal net worth?

.
I've been at events where Michael was interviewed on stage and have posed questions to him during the Q&A. He is an extremely intelligent, not to mention, humble guy and I think a great manager. He raised a bit of money from angel investors to get WS started, but apparently did not invest any money personally. His contribution was the idea, his blood, sweat and tears and recruiting an impressive team from the start. Although he was involved in a Silly Valley company that was sold he didn't have much of a payout from it. I do not get the sense at all that he is a 'what's in it for me' type of person, at least not solely. Why do you think so? You could say that about any entrepreneur.

Given he has created a substantial company, has been able to continue to raise money (over $300M now) I do not see how your questions about his personal investment, net worth and pay package are relevant. More power to him for creating more than most of us ever will and if he is able to leave with his pockets lined and loaded with OPM. No doubt he has a not insignificant share of the company as one of the founders, but it's likely not even 5% given 83% is owned by Power Financial and another significant percentage by Allianz.

Given what it seems will be an extremely long and unexpected road to profitability, what is relevant is how long the investors will be willing to endure WS losing money without making some major changes in strategy such as merging with a large entity such as Power Financial/IGM or being sold to someone else. WS has almost 300 employees. Even at a very modest $80K per employee that's a $2M/mos payroll. Double that for other overhead, then add the almost $2M/mos for their marketing budget and you are at close to $70M year burn rate. Right now they have only $30M/year in revenue, never mind profit, so they are likely losing close to $40M/year. Divide the $70M by 0.5%, assuming all their assets yieldthat fee, which they do not, and they need $14B+ in assets just to reach break even. However, that's if overhead does not increase as they reach that figure, which it will. Then to erase the losses they incurred to get to $14B in assets they will likely have to earn about another approximately $500-$750M+, ie $40M/yr and increasing loss x 10-15+ years in business. They'll be going back to investors for more and more funds to keep the ship afloat.

I figure they will likely need to get to $25B+ in assets before they earn back all their losses and are at break-even. That's going to take a long time given their slowing growth rate which was an average of 135% annually to Feb 2018 but has now slowed down to 55% annually as of Jan 2020 with a distinct downward growth trendline from the year before which was 85% annually.
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eonibm wrote: Perhaps the balance will shift in WS's favour for those who do not want to pay trading fees to hold individual stocks, which I think is what you are referring to rather than index funds which also hold only stocks. The problem is that those who want to hold individual stocks vs having their money actively managed by others, in index funds or have their stocks traded and held at the major brokerage is such an infinitesmally small fraction of 1% of the marketplace that it amounts to a rounding error. More significantly, though, is that WS does not make any revenue on those clients who hold individual stocks so it is impossible for that segment of the market to have any effect on WS's revenues and profit.

Since WS started offering no trading fee all that has happened is their growth has slowed down even further.
I have no source data to validate the statement that WS growth has slowed down further since it started to offer no trading fee. So I will let this rest. It is however good to know that I am in the good standing of infinitesimal small fraction of 1% of the market place. Happy investing !
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cchenzz wrote: I have no source data to validate the statement that WS growth has slowed down further since it started to offer no trading fee. So I will let this rest. It is however good to know that I am in the good standing of infinitesimal small fraction of 1% of the market place. Happy investing !
I do. If you read any of my posts you will see I never claim anything without factual back-up. They started offering free trading in August 2018 and growth has dropped precipitously since. Average annual growth at various points in time (calculated from data provided from the Globe article above) :

Feb 2018 - 135%
Oct 2018 - 98%
May 2019 - 85%
Aug 2019 - 83%
Jan 2020 - 55%

I was not implying the cause of slower growth was offering free trading but rather it has not affected their growth at all. Furthermore, it has not abated their rapid decline in annual increases in AUM as the only way for that to happen is if those using their trading platform sold their stocks and had their funds managed by WS instead. As for you, that is not the reason people switch to their free trading platform and so it does not add a dime to WS's revenue. In fact, it only adds to their overhead.

It's good that free trading is a huge benefit to you. However, free trading won't attract a lot of customers to WS just for that reason. This is because prudent investors have seen the studies that show that 95% of even professional active managers with CFA's, PhD's, etc. don't beat the broad-based indexes over the long-term, ie 15-20 years. Therefore trading is a speculative crap-shoot which is not going to be offset by saving a couple of shekels on trades. A tiny % of smart and/or lucky investors can beat the index if they are highly concentrated in a few positions, but without diversification among stocks and sectors comes a lot of risk.
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Cannot see the article(behind paywall), I would think some of the reason is due to psychology. People are scared of losing their hard earned money(they might save those money for retirement, so you are pretty much thing 40 years range) and certainly Big bank would give the perception that they are safer and small company might bankrupt anytime. They are good now, but how do you know where your money is after 30,40 years later.
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songanddance wrote: How does this work @bylo?

Thanks,
Sam
per the Firefox extension "Selected sites will have their cookies cleared and referer set to Google. You should uncheck sites you are logged in to otherwise you will be logged out on every visit."
Install instruction are on the link bylo provided. One for Chrome and another for Firefox.
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Bobberts wrote: One for Chrome and another for Firefox.
FWIW I haven't been able to get the one for Chrome to work. It may be because of some interaction with the other ad-blocking and privacy-enabling extensions I have installed. The one for Firefox works like a champ.
veni, vidi, Visa

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