Toronto-based Wealthsimple Financial Inc. has become the first Canadian robo-advisor firm to open up shop in the U.S. In doing so, the financial technology (fintech) startup is moving into a potentially bigger pool of clients – and facing significantly more challenges.
“There are so many players already in the [U.S.] market, with some very established players in the robo-advisor space,” says Pauline Shum Nolan, a professor of finance with York University’s Schulich School of Business in Toronto and CEO and co-founder of Toronto-based online research platform PW Portfolio Analytics Inc. “It’ll be very interesting to see how they’re going to differentiate themselves and market themselves.”
Although Weathsimple’s new bricks-and-mortar office is in New York, its online services are available in all 50 states, making a long-term goal of Michael Katchen, the company’s founder and CEO, a reality. “Building a global financial services platform has always been at the heart of our ambition,” he says.
Since launching in 2014, Wealthsimple has become a Canada-wide operation with $750 million in assets under management (AUM) and more than 20,000 clients. Its staff has also grown to 75 employees, about 10 of whom are located in New York. As well, Montreal-based financial giant Power Financial Corp., a longtime supporter of the robo-advisor, has invested $50 million in the startup.
Wealthsimple’s move makes strategic sense, given the much larger population – and potential client pool – in the U.S, says Mike Foy, director of wealth-management practice with J.D. Power & Associates in New York. “[If] you have the platform, why not scale it into a market that’s roughly 10 times the size?”
A potential challenge for Wealthsimple, however, is that the U.S. robo-advisor market is also larger and more established than Canada’s. For example, independent New York-based Betterment LLC and Redwood, Calif.-based Wealthfront Inc. have been around since 2008 and now have more than US$7 billion and US$4 billion in AUM, respectively.
As well, San Francisco-based Charles Schwab Corp.’s Schwab Intelligent Portfolios now has more than US$10 billion in AUM after launching in 2015. Malvern, Penn.-based Vanguard Group also launched Vanguard’s Personal Advisor Services channel in 2015, which now has more than US$30 billion in AUM. And Charlotte, N.C.-based Bank of America Corp.’s Merill Lynch Wealth Management recently entered the robo-advisor market with the launch of Merill Edge Guided Investing.
Wealthsimple, however, still sees plenty of opportunity in the U.S. – even with the presence of large players. “Despite the rise of the robo-advisor market in the U.S., it’s still peanuts in the context of the financial services industry,” Katchen says.
New York-based KPMG LLP estimates the digital advice market in the U.S. to have between US$55 billion and US$60 billion in AUM at the end of 2015, compared with Washington D.C.-based Investment Co. Institute’s estimate of about US$24 trillion in retirement assets.
In large part, Wealthsimple plans to make the most of that opportunity by sticking to its strengths. Says Katchen: “We’re going to use a lot of the playbook that worked for us [in Canada] and try a lot of new things.”
More specifically, Katchen argues that Wealthsimple’s service model of balancing technology with human advice will win over American clients. Other advantages include the backing of Power Financial, Katchen says, and the robo-advisor’s marketing initiatives that tend to focus on quirky aspects of finances, such as investing in brand name purses or tiny houses.
Another important consideration is fees, given that these technology startups are usually touted as a lower-fee alternative to traditional financial advice. Wealthsimple’s pricing, while a little higher for basic services, is competitive regarding premium services.
For example, Betterment and Wealthfront charge 0.25% in management fees while Wealthfront waives fees for the first $10,000 invested. Wealthsimple waives fees for accounts of less than $5,000, then charges clients a 0.5% management fee for accounts between $5,000 and $100,000.
However, Wealthsimple’s fee drops to 0.4% for accounts of $100,000 or more, which also qualify for the Wealthsimple Black services, the firm’s premium service. Betterment, for its part, recently launched its own premium service, with a management fee of 0.4% for accounts of $100,000 and 0.5% for accounts of $250,000.
Where Wealthsimple could face a challenge on fees is with the pricing structures of some of the larger, incumbent U.S. financial services firms that have launched robo-advisor services. Schwab, for example, does not charge a fee for its robo-advice platform, but makes money by investing clients in proprietary products.
The zero-management-fee incentive could be enough to win over some of the Canadian startup’s target clients. A December 2016 survey from J.D. Power, found that 77% of millennials who currently work with a financial advisor said they would switch to a robo-advisor platform with no fee and proprietary products, while 31% said they would switch to a robo-advisor platform with a 0.5% management fee and a variety of product options.
“This question suggests a much greater price sensitivity among millennials,” says Foy, “who, again, are exactly the people that firms such as Wealtshimple are targeting.”
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