Investing advice at a lower cost
Wealthsimple provides financial guidance online
Michael Katchen admits he was that “weird” kid who took an interest in investing at an early age.
“I won my first stock contest at 12 and have been investing ever since,” recalled the 27-year-old in an interview. “I was always that guy among my friends that people would come to for investment advice.”
Katchen is now hoping to provide financial advice far beyond his circle of friends. His startup, Wealthsimple, is an online investment management outfit that promises sound financial guidance at a price lower than the incumbents, including the big banks.
“Investing for most folks is this scary, overwhelming, complex thing. And unless you have a ton of money, you really can’t access great advice,” Katchen said. “We’re trying to democratize access to really high-end, sophisticated advice — at a low cost.”
Wealthsimple provides each client with an investment adviser ( called a “wealth concierge”) who helps match investments to the client’s long-term goals and risk tolerance. It doesn’t occupy retail space. Instead, its advisers are available online, including through video chat and text message. A Wealthsimple mobile app allows clients to track their investments at their leisure.
On April 9, Wealthsimple announced $10 million in Series A funding from Power Financial Corp.; Power Financial could pump an additional $20 million into the startup in the next year.
Katchen said Wealthsimple’s virtual and paperless approach allows it to charge clients an annual rate of just 0.5 per cent of their Wealthsimple assets. “The average Canadian is paying 2.5 per cent for mutual funds.” he said. “Investing is way too expensive in this country. Canadians pay the highest investment fees of any country in the world.”
Wealthsimple’s reduced fees are a big selling point. They also represent the company’s biggest challenge, said Christian Lassonde, whose venture capital fund, Impression Ventures, put $500,000 into Wealthsimple last year, representing a quarter of the startup’s $ 2 million seed round. Lassonde is also one of its first users.
“I’m a big believer that you’ve got to eat your own dog food. If I’m going to invest in this, I better put some personal money into the system to see how it performs,” he said.
So far, he’s been “thrilled” with Wealthsimple’s performance, but he acknowledged the 12-person startup must overcome the misconception “you get what you pay for.” Most people assume a $50,000 car is better than a $20,000 car. The same goes for suits, houses, and most other items. “If you’re willing to pay more, you’re more likely to get a better service or product,” Lassonde said.
“In the financial industry, that’s not the case. Paying more does not get you better advice. Their challenge is convincing people that paying less is actually better than paying more.”
He contends that’s a hurdle Wealthsimple can overcome, mainly because of the experienced team Katchen has assembled, much of it from a previous successful venture.
After graduating from university, Katchen worked for global consulting firm McKinsey. Some former colleagues later asked him to join 1000memories, a Silicon Valley-based startup that began in the Y Combinator accelerator. Ancestry. com bought 1000memories in 2012, providing Katchen and his colleagues with an undisclosed cash windfall. Shortly after, Katchen developed an Excel spreadsheet with tips to help his colleagues and friends set up “thoughtful” investment portfolios.
“That was the kernel of the idea for Wealthsimple,” he said. He returned to Toronto in 2014 and raised $2 million in just 2½ weeks and launched his startup in September.
Wealthsimple now has 1,000 clients. The minimum investment is $5,000, but Katchen said some clients have multimillion-dollar accounts. “Eighty per cent of our clients are under 45 years old, which is the inverse of a traditional advis- ory practice.” Its client base is increasing 20 per cent a week, but Katchen acknowledged some potential clients remain hesitant about putting their retirement savings into an unproven startup. “Obviously, the questions sometimes come up: ‘How do I know I can trust you?’ and ‘How do I know you’re not going to go out of business?’ ” he said.
His assurance: Wealthsimple can’t touch its clients’ accounts; it can only issue trading instructions. And all accounts are protected by the Canadian Investor Protection Fund and insured for up to $1 million.
Katchen also points to his roster of investors and advisers, who include Joe Canavan (former CEO of Assante Wealth Management) and Roger Martin ( formerly with Rotman School of Management at the University of Toronto). “It’s a team that’s tried and tested,” he said. “This isn’t a startup team.”
Those names give Wealthsimple the credibility and experience it requires to grow, he said. “I see us as a major independent financial institution, serving thousands and thousands of clients ... with billions of dollars in assets.”
Lassonde is equally bullish. “I think this largely reshapes the financial services business,” he said. “There’s more than a trillion dollars in mutual funds in Canada. Could Wealthsimple and other automated systems get to a trillion dollars in assets? I absolutely think so. I think the more interesting question is: will it take one year, two years, five years, 20 years? I think it’s going to be much shorter than people might expect.”