Wealthsimple, OPM Wars and The Globe are caught in a Mexican standoff

You gain trust when you don’t hide the details or present this perfectly varnished vision of life” - Mike Giepert, a Wealthsimple marketing guru, as quoted by The Globe

You build faith by being big, and looking big, and that’s why I’m obsessed with this idea of going public when we can.” - Mike Katchen, another Wealthsimple marketing guru

Apologies - my December 26 post on Wealthsimple’s new initiatives should have been titled Move over Baby Jesus, Wealthsimple also had an active December. I don't want you to think that my killer editorial instincts are dulling in any way.

The Globe yesterday covered similar terrain, but added this sentence: “It [Wealthsimple] says it has more than one million Canadian clients using its financial products, which include online investing, savings, trading and tax services.”

This is a trap. Strictly speaking, this sentence is accurate because it is merely quoting Wealthsimple (“It says”). But Wealthsimple should not be taken at its word. I am not the one saying that, Wealthsimple itself says on its homepage, in big bold letters: “Don’t just take our word for it”:

Let’s analyze this “1 million” claim. For much of the latter part of 2019, Wealthsimple was claiming $5 billion in AUM and 175k clients, not 1 million. Near the end of 2019, however, Wealthsimple changed the formula to claiming that a million people use their products. How did it achieve this? Through typical financial industry hocus pocus. They took their OPM clients and added several 100ks of SimpleTax clients. SimpleTax being the online DIY tax filing company they acquired in September 2019. The claim is questionable, since 800k Canadians are not filing their taxes in December, so they are not “using” the product. It would be more accurate in the past tense. But even calling SimpleTax a “Wealthsimple product” is a stretch, as it was a completely independent startup until the September acquisition. SimpleTax has not even undergone a single tax season under the control of Wealthsimple. Also, assuming that the bulk of 800k or so past SimpleTax tax filers will return for the eventual 2020 tax season is a forward-looking statement. Again, the use of the present tense is questionable. One point in favour of Wealthsimple’s interpretation is that tax filers do generally keep the same service from one year to the next and tax software typically saves past years’ data in between. But again, that would be misconstruing clients’ endorsement of SimpleTax as an endorsement of Wealthsimple products. SimpleTax user data came under the custody of Wealthsimple, whether the clients like it or not. These are debatable claims, I will let you judge where the truth lies.

And whether The Globe should do them the PR favour of repeating that claim, when their own archives from a few weeks prior present the 175k number is another question. Does Wealthsimple really need to resort to these “act as if” tactics? In only three months, OPM Wars has gathered a million+ readership, yet you never hear me boast about that, do you? Full disclosure: I recently acquired the mailing list of a Nigerian Prince.

Let’s consider the AUM figure of $5 billion, now reported on their website. I am adjusting that figure to $6 billion (to include the $1 billion they have in the Wealthsimple for Advisors division that will be spun off in 2020). So the $6 billion figure compares to $3.4 billion at the end of 2018 and $1.7 billion at the end of 2017. So the firm has grown 76% in its 5th year, a slowdown from the previous 100% growth. These are reasonable hypergrowth numbers (Shopify, a real rocketship was growing around 90% even in its 10th year). But the growth rate should be analyzed with the following caveats:

-2019 had bullish conditions with both stocks and bonds going up considerably (stocks up 30%, figure bonds on your own). This provides a natural tailwind both in terms of inflows and marking up of existing assets.

-the actual revenue growth rate is probably lower because the AUM figure likely includes savings accounts and possibly even the free brokerage accounts

-the growth rate doesn’t reflect inevitable fee erosion…US robos are already at 25 bps. Questrade in Canada already offers fees of 25 bps.

I heard Paul Desmarais III mention that Wealthsimple clients start small but tend to add about $1k per month to their accounts. I thought that was an important positive for my analysis, but this growth dynamic is already embedded in that 76% growth figure. Going forward, you have to factor a bear market, increasing competition and fee erosion.

All this taken together, my sense would be that Wealthsimple’s hypergrowth story may well be about to hit a wall. Their newer products tend to have even worse economics. SimpleTax has a “pay what you want” model. When it was an independent shop, even someone with a heart of stone would pay their suggested contribution (they tug at your heartstrings by showing pictures of their employees near the end). Now that it’s in Power’s hands, why would you care about making the Desmarais richer? Then consider free brokerage, free bank accounts, etc. and Wealthsimple will have a lot to prove in 2020 - which will be a Path to Profitability kind of a year for startups.

Most unicorns on a genuine hypergrowth path I have followed are coy on their IPO prospects. Wealthsimple this year, played up its IPO prospects, even though, in my view, they are not on a path to IPO (not a well-received one, at least). Could that be because Wealthsimple, almost uniquely among startups, has already flipped control to one of its natural acquirers? Could the IPO spin be primarily intended for internal consumption to incentivize employees?

In August, Wealthsimple played up its partnership with an Ultra High Net Worth firm, yet only a few months later, it is spinning off the division that is in charge of that. In 2017, Mike Katchen stated that Blackrock reached a trillion in assets in 18 years and that he was in a race to reach that within 15 years of founding. To go from $5 billion to $1 trillion in the remaining 10 years will require 70% annual growth rates. I do not believe they are on a trajectory to meet that goal, not organically anyways.

Having said all this, I have great respect for the execution ability of Wealthsimple’s management team. Startups like Wealthsimple should not be analyzed in a static manner. If someone in the 90s had analyzed Amazon as a mere bookseller and using assumptions of the then existing delivery logistics…they would look pretty silly now. The only people who should take umbrage at my coverage are the robo-advisors I am not covering. Forgive me for saying this, but I couldn’t get out of bed if I had to write an article about Justwealth. Fingers crossed that they’re not backed by anyone powerful? I have to pick my battles. Finally, keep in mind that I am an external analyst of a private company making conjectures, there’s some possibility my interpretation of the million user claim is wrong. That’s why it’s a Mexican standoff. Who, if anyone, will back down? The suspense is killing me! If I am wrong, given the liabilities for defamation, I will have to flee to Lebanon Carlos Ghosn-style. It was nice knowing you, I have to brush up on my Arabic now.

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