What the Globe & Mail missed about Wealthsimple: Paradigms, Moats, and Millennials
By: Jason Periera Editor & Contributor: Alexandra Macqueen
On February 7th, the Globe published an article – Why Wealthsimple and robo-advisors aren’t scaring Bay Street anymore – concluding that “the robo-revolution has been a flop:” “the harsh reality is that [Wealthsimple] simply isn’t growing fast enough. Even more sobering, the whole sector is facing a reckoning.”
Since then, several people have reached out to ask my opinion of the piece. In response, I thought I would take the time to share my thoughts in this blog post.
First, full disclosure: I have friends at Wealthsimple as well as their primary investor Portag3 Ventures; I have client accounts on the Wealthsimple for Advisors platform; and I also write a regular column for Globe Advisor, the Globe’s targeted offering for financial advisors. So technically, I have a connection to both camps.
Secondly, I won’t spend much time on comments from the article that dismiss the power of algorithms and automation, like, “Trusting an algorithm is a leap of faith very few people are willing to make.” Instead, I’ll just quickly say: paradigm shifts take time. Twenty years ago, few people were willing to type out their credit card numbers into a browser; now they let those browsers store their credit-card numbers directly. Given we’re not that far off from trusting algorithms to drive our cars, trusting an algorithm to rebalance my portfolio seems more like a ‘hop of faith’ than a leap.
With those preliminaries out of the way, here’s my take on the article: While it effectively covered the current business challenges facing robos, it also fell short of stringing together a narrative to explain exactly how a company facing these challenges was able to raise $100 million in funding. (Put another way, what do Wealthsimple’s funders know or believe that the Globe does not?)
In my view, the answer to the question of Wealthsimple’s funding success encompasses a combination of changing paradigms and changing demographics. And beyond funding today’s Wealtsimple, I believe these two factors will ultimately lead to Wealthsimple’s business success over time.
Changing paradigms – and the value of moats
Imagine it’s 30 or even 50 years ago, and you want to launch a new, nationwide company to compete with banks on one more of their lines of business. You would be immediately facing two major obstacles: distribution and brand recognition.
At that time, distribution was handled through physical presence: physical branches and physical bodies. In a pre-internet, pre-ATM world, you had to go somewhere and/or talk to someone to do anything with money, other than spending it. Here, Canada’s banks were more than happy to help, as they had plenty of branches, built up over more than a century of organic growth.
Brand recognition was also a major issue. How do you get people to know who you are, and then trust you with their dollars? The market incumbents – your competitors, the banks – already have more presence (signs) than you do, and can outspend you all day to make sure their logo gets everywhere.
Those two factors constituted massive strategic moats for Canadian banks – combining to make a competitive advantage so strong that no large international player has ever managed to make a real dent in the Canadian banking market.
Now, fast-forward to today, when the internet has changed everything.
Generations of “digital natives” are now in adulthood. In fact, there are kids about to enter university who, although they were born before its release, cannot actually recall a time before the existence of the iPhone.
Every day, more and more people expect every experience to be quick, easy, and mobile. This is no longer new: this is the norm.
This paradigm shift is directly impacting banks. Branch networks are slowly becoming a “costly luxury” and more branch locations are closing down every year. Meanwhile Koho, a Canadian neobank available via mobile app, has managed to pick up approximately 250,000 depositors in fewer than four years – with no branches, just an icon on your phone. (And traditional bank branches are transforming, too: in December, RBC opened a non-branded, “digitally-activated” ‘RBC eXperience’ branch that focuses on “selling experiences, not products.”)
Yes, the banks are offering online capabilities and mobile apps, but my point here is that because the way we interact with money has fundamentally changed, an upstart company like Koho can actually compete with the big banks. It now takes lines of code, not bricks and mortar, to take on the Big Five, and that makes them vulnerable.
Your brand as your moat – and how Wealthsimple will win
Let’s look more closely at brand recognition as the Big Five’s moat.
The reality is that even if you had (like Wealthsimple) $100 million burning a hole in your pocket, it would be impossible to gain the level of recognition Canadian banks have with the average Canadian. Decades of marketing, across all channels – including sponsoring major arenas and nationwide charity events – and most Canadians, if asked, would be able to name all Big Five banks with little to no effort.
Therein lies the potential chink in the bank’s armour: the banks target everyone. As global travel entrepreneur Meredith Hill says, “when you speak to everyone, you speak to no one.”
Think for a minute: when’s the last time you saw a bank commercial or read a bank marketing piece and said: “that’s me! That bank gets it, but those other guys don’t.” I am going to guess the “last time” was actually never.
This is where Wealthsimple is different. Their strategy is to target a niche lifestage subgroup – Millenials – who speak a common language, have grown up with a shared history, and have now reached the life stage when the services Wealthsimple provides are increasingly important.
Saving, investing, basic planning, speculation (via Wealthsimple Trade), tax filings (via the SimpleTax acquisition), and now banking (via Wealthsimple Cash), and soon, manufacturing ETFs: Wealthsimple has you covered.
Heck, throw in some lifestyle bells and whistles, like airport lounge passes, and now your target market will really love the experience you’re offering, because there’s no way their low-fee credit card was getting them that – especially packaged in a clean, easy, pretty, quick, and cost-effective way.
But what’s more important than all of the various Wealthsimple offerings is something even more basic: the way Wealthsimple speaks to Millenials.
In short: They speak the language of Millenials – and not just the vocabulary, but in their choice of focus. The Wealthsimple newsletter is a prime example of their marketing mastery, as it features (for example) celebrities recounting their personal experiences with money, along with articles that make socially-responsible investing a key component of their messaging. All of this underscores how deeply Wealthsimple understands their target demographic.
And even more, Wealthsimple knows where to find and reach that demographic. Sure, that includes (ultra-expensive) Superbowl ads (keeping in mind that Canadian Superbowl ads can be a surprisingly effective advertising spend), but Wealthsimple also has made heavy bets on podcasts and social media marketing, a.k.a., the exact spaces where Millennials spend their time and attention.
While you may not click on a Wealthsimple Snapchat post with Kylie Jenner musing about her history with money, Millennials clearly want exactly this kind of content! Notice, in contrast, a distinct lack of Wealthsimple sponsorship for curling or darts, and take one guess which demographic doesn’t care about either.
While banks pay big money to be at the top of paid and organic search results, shotgunning their ads everywhere, Wealthsimple speaks only to its target demographic – and only targets where that demographic spends its time. Marketing dollars can go a lot further when you have a clear target in mind and you shoot with a rifle, not a shotgun.
Wealthsimple’s marketing efforts boil down to just one goal: they are trying to ensure that when a millennial goes to Google to figure out where to put their money, they don’t type in “investing” or even “robo-advisors” – they want and need them to type in “Wealthsimple.” Their sole goal is being top of mind (for their target market) for their service offerings.
Yes, fulfilling that goal costs A LOT of money . . . but when it’s done successfully, it becomes a moat: keeping competitors out, and keeping customers in. Once established, this moat will be hard for others to surmount – and Wealthsimple has a big lead on getting and keeping Millennials as clients.
Millennials and banks: “Skate where the puck is going”
Why Millenials as a target market? After all, as anyone will tell you, they don’t have much to invest.
The answer to this question is, in my mind, twofold.
First of all, Millennials hate banks. Their generation’s early experiences with banks was defined by the 2008 banking crisis, and what they saw was a bunch of greedy recklessness from the exact institutions their parents told them to trust.
In fact, polls have shown Millenials are 50% less likely than Boomers to demonstrate brand loyalty to financial institutions.
Enter Wealthsimple: an app made by Millenials, for Millenials, speaking their language and making their life easy . . . well, that’s more likely to at least get their attention and give Wealthsimple a foot in the door.
As for the banks launching their own robos? For the most part, the offer is really just a thin digital layer over the same old bank business: bank-manufactured ETFs, account fees, transaction fees, and a management fee. Also, who was it marketed at? Again, the target is apparently “everyone,” which is really . . . no one.
What remains to be seen is if Wealthsimple can both mature with Millennials and continue to keep them happy – but if they achieve these two goals, they will have customers for life. Momentum can be a powerful thing! I mean, how often do any of us change a financial product or institution we are at least satisfied with? Now, imagine your loyalty if you actually liked them!
“Eyes on the prize”
This brings me to my second point: sure, Millennials may have little to invest today, but in my opinion, that’s not what Wealthsimple has their sights on.
For the last twenty years, I have been hearing non-stop about the unprecedented wealth transfer that will occur as when Boomers start dying – and at the same time, many advisors have told me they don’t take on their client’s kids “because they have no money” or the advisor “can’t relate” to them.
Now, depending on where you draw the line, the oldest Boomers will turn 75 this year. What do you think will happen when they pass on? Do you think their advisor will be able to hold onto the dearly-departed’s accounts – or do you think that Wealthsimple will start to see an uptick in new money?
As I see it, that’s Wealthsimple’s ultimate play. Looking around at the competitive landscape, they said to their competitors, “let’s get this straight: the demographic who is soon to be handed all this money is the same group you guys are ignoring? Sure, make fun of us all day for blowing money on ‘people with no money,’ give us a few years and we’ll see who laughs last!”
While that take may sound a bit morbid, Boomers don’t even have to die for Wealthsimple to win. How many kids take over their parents’ affairs when the parents lose capacity – or even just interest? The asset-owners don’t need to shuffle off this mortal coil; they just need to hand over the keys.
Or consider what happens in the next market correction – when the parents’ old-school, stock-picking broker, who doesn’t implement Modern Portfolio Theory and thinks he can “time the market” – fails to deliver on downside protection?
The script almost writes itself: “Hey mom and dad, check it out, while the markets fell by 25%, I was down only 7% – and I even pay less than you do to invest, and my investment manager actually speaks plain English. Tell me how much the fancy-talking guy you deal with, who charges you a lot more, lost you? Tell me again why you need this guy? Just hand me your phone and we can get your investments switched over in five minutes!”
(And no, the “five minutes” is not an exaggeration.)
Given all this, Wealthsimple CEO Michael Katchen’s bold goal of hitting $1 trillion in assets under management is starting to look a little more feasible. (“I think the next company to get to one trillion dollars is going to do it in 15 years or less, and I want to be that company,” Katchen told a small crowd in 2017, as recounted in the Globe article.)
“But it's too simple!”
Yes. Wealthsimple is, as its name suggests, a simple and unsophisticated offering at this point, but it has also come a long way: Different service tiers, planning, expansion into other areas (banking, tax, manufacturing). And I have no doubt that they won’t stop there: mortgages, lending, credit cards, even crypto are all things they have openly spoken about. And once they have become the “simple” solutions for all millennial needs, what do you think is next? They’ll move upmarket and seek to capture more market share in every line: Clayton Christensen’s theory of “disruptive innovation” in action.
While there are plenty of polls out there pointing to clients preferring humans over robos, keep in mind two things. The first point I made earlier, that paradigm shifts take time. The second is that Wealthsimple reads these same polls. There is nothing stopping them from “laddering up” and offering comprehensive planning services for high net worth clients, that require said level of service, at an additional cost. They have already segmented their offering and offer a specialized offering for accounts of over $500,000 called Wealthsimple Generation. If building out an even more exclusive offering is the difference between them holding onto accounts over $1 million, guess what will happen?
Meanwhile, the banks will have to balance out undermining fat margin business vs hitting their Bay Street targets all while facing a company, in an industry, where more and more showing profit is a secondary priority until you have grabbed as much market share as possible. Sound like a ridiculous strategy? Well, just take a look at Amazon's profit history. It’s hard to compete with a company who gets rewarded in the market for turning a loss.
Closing thoughts: Can Wealthsimple keep it up?
Looking forward, the only questions that remain in my mind are:
Can Wealthsimple keep up the spend required to build – and maintain – that moat?
Will the coming wealth transfer happen soon enough to pay off for Wealthsimple?
Can the company continue to evolve as the needs and preferences of their target market evolve?
While the answers to questions one through three are playing out, will yet another paradigm shift arrive that undermines their progress?
As for me, I gave up on trying to predict the future a long time ago. Now, I just contemplate possibilities.
The Globe and Mail contemplated a bleak outlook for robos, and for Wealthsimple in particular. In contrast, I’ve laid out, here, the case for what can happen if Wealthsimple plays their cards right.
Ultimately, it’s impossible to say what will happen with any confidence, but the odds are pretty good that five to ten years out, either this article or the Globe’s will not age well.