What Wealthsimple can learn from Kevin O'Leary

The essence of success is that it is never necessary to think of a new idea. It is far better to wait until somebody else does it and then to copy him in every detail except his mistakes. -Some author

Today, I feel sad because a truly great mogul outing story I was working on had to be canned. The story was going to be called That time I met Keyser Söze. But as you can imagine, you don’t mess with Keyser Söze. As you know, when I feel sad, I pick on Wealthsimple, so here we go:

Let me state upfront that Kevin O’Leary is anathema to the topic I most care about - excellence in investing. On the other hand, I have high regard for many aspects of Wealthsimple and what Mike Katchen has accomplished. I may disagree with millennials owning any bonds, but I think overall, it’s a respectable school of thought. I think it’s better than 80% of the options available out there. If a frenemy asked me how to invest and I didn’t care to spend too much time talking to them, I might point them to Wealthsimple. How’s that for an olive branch?

Many finance grads dream of controlling billions of dollars. Almost all of them, myself included, go at the problem by trying to be the best investors we can be, under the assumption that money follows performance. Mike Katchen went at it in an entirely different way. He picked an OK, satisfactory investment strategy that was sure to work and very low-maintenance and focused all his energy on marketing and the client experience. In so doing, he beat all the people who were much more interested in the craft of investing itself.

But think of the downsides of the Wealthsimple growth model. Katchen has raised ~$300 million from people who have high return expectations. Sooner or later, his clients will have to pay that back. He doesn’t control his company anymore given that Power Financial and affiliates are majority owners. He has about 300 employees for $6 billion AUM. (In contrast, a frugal operator like Tom Stanley had 5 employees when managing $1 billion). He’s stuck at 50bps fees and probably heading lower over time. Wealthsimple decided from the start to go full throttle on three fronts (investment operations, the marketing machine and top-notch client experience tech). On balance, I think it may still work out in the end. Nevertheless, all this has resulted in perhaps the least financially efficient way to raise $6 billion.

Now, consider the alternative strategy of doing these things sequentially, rather than concurrently. That’s exactly what reality TV star and affront to Finance 101 Kevin O’Leary has done. For many years, he played a financial expert on TV. And eventually, enough people bought this that he was able to raise a lot of money. He built the hype machine first and then the OPM operation. Within two years of launching his first OPM business, Kevin O’Leary had raised over a billion dollars. And he did all this shortly after the financial crisis, when investor sentiment was still very fragile. Launching in 2014, Wealthsimple took 2.5 years to get to a billion. My numbers might not be exactly accurate, but the broader point is that O’Leary was so much more efficient at raising money.

This shows that fame and attention are the most important thing in raising money. Passive investing is a commodity service. The real innovation is on the marketing and client experience side. Getting attention doesn’t really burn money. The media industry is largely unregulated. If anything, they have special rights - think of all the leaks of confidential information they are able to get away with. In a saturated, hyper-competitive world, attention is the supreme currency. Tech-savvy, enormous fundraises, the backing of financial royalty - all those are secondary.

Of course, O’Leary’s business eventually faltered and had to be sold to Canoe Financial after assets fell to $800 million. Those problems have been well reported and primarily had to do with investment strategy. Wealthsimple has been much closer to figuring the three-legged stool of OPM success. They are not too shabby at getting attention. But overall, in my view, neither Kevin O’Leary, nor Wealthsimple have figured the optimal recipe.

O’Leary then launched O’Shares in the US in 2015, also an ETF company. That venture has about $700 million in AUM. Just like Wealthsimple, O’Leary has raised less assets in the US than in Canada (ie he didn’t break the billion-dollar mark). As of end of 2018, Wealthsimple had $89 million in US assets. O’Leary was again faster than Wealthsimple in the US. What do I conclude from all this? That it’s easier to build a media hype machine in Canada. The market is not as saturated. It’s a smaller community, so it’s easier for things to go viral. O’Shares appears to have 10 employees for the $700m AUM, which also shows how out of whack Wealthsimple’s staff numbers are, no matter where you look.

I have reported before on Wealthsimple’s comparatively anemic numbers in the UK and US. Revenues in the UK for 2018 were £44k. Wealthsimple insists on reporting one global AUM figure, that conflates numbers in 3 very uneven markets. That AUM figure also mixes up robo-advisor assets with high-interest savings assets. Those are two different products with very different economics and prospects. I realize it’s a bit rich for a guy writing anonymously to be advocating more transparency.

If I were conspiratorially minded, I might say that the primary purpose for Wealthsimple to have offices in London and New York is to create the illusion in the minds of Canadians that it is a globally competitive company. But I am not a conspiracy theorist. Mike Katchen has talked about the need to have “naive ambition”. And that may be the better explanation. I would write more, but if you’ll excuse me, I have to take a call from the OPM Wars office in Monaco.

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