Thu 22 Mar 2018 // #Investing
(Only got a minute? This is what you need to know)
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We really like new kids on the block Wealthsimple. Their investment strategy is completely in line with what we like to see here at Open Money Club - simple, diversified, passive. Their fees are transparent and their interface and user experience is nice.
What we like:
What we don’t like:
Wealthsimple is a Toronto-based “Robo-advisor” which launched here in the UK in September 2017 having already amassed more than 40,000 customers with over £750 million in combined assets under management (AUM). They now have over $2bn in global assets. This makes them one of the largest robo-advisors in the UK market. Wealthsimple’s mission is to “bring smarter financial services to everybody, regardless of age or net worth." - Michael Katchen, CEO.
Wealthsimple falls within the new buzz-word category of “Robo-advisor”. Robo-advisors, typically, are online wealth managers that use modern portfolio theory and technology to bring automated, diversified investment portfolio solutions to the mass-market at a reasonable price.
Wealthsimple follows a static investment strategy. Wealthsimple’s investment strategy is solid and follows the principles of diversification and passive management.
Diversification means that your portfolio will be spread across a broad range of asset classes and underlying investments including stocks from around the world, government bonds and corporate bonds. The exact mix of these asset classes will be determined by your own personal investment objectives and risk tolerance, but in all cases your portfolio will be globally diversified. Diversification is important and is thought by many to be the only “free lunch” in investing. The reason diversification is important is that you minimise your risk to any specific company or security - if a company in your portfolio goes bust it will have a much smaller impact on your overall portfolio if you are well-diversified.
Passive management means that once your portfolio has been constructed, Wealthsimple are not going to mess with it. They will help to “rebalance” your portfolio when allocations drift away from targets, but will not be getting out their crystal balls to predict the future. Research has proven time and time again that the vast majority of active investment managers (investment managers who use discretion over your investments based on their superior “skill”) underperform what their clients could have achieved by following a passive strategy. Some research has proven that 98% of active managers will underperform over the long term and picking which active managers are the good ones is just as difficult, if not impossible. Passive management means that for any given level of risk, your portfolio will achieve the returns of the global market - sometimes it will go up, sometimes it will go down.
Here is an example asset allocation of a “balanced” portfolio:
Your portfolio will be invested across 10 - 15 underlying Funds, which each represent a broad asset class. These funds are typically low-cost “index tracking” funds, which means that they are passively managed to replicate the performance of a certain market. For example, your portfolio could be investing in BlackRock’s UK Equity Tracker Fund, which is a Fund which aims to replicate the performance of the UK stock market.
As you may have gathered - Wealthfront invest in broad, passive index investments as opposed to single stocks. So if you are looking for a platform that will let you trade Apple - this isn’t for you. If you are looking for a sensible approach for investing over the long-term then you should definitely check our Wealthsimple.
While Wealthsimple is a “robo-advisor”, which means that their investment strategy is automated, as opposed to being individually managed by a human, there are still humans there for you to speak to. Before you even sign up as a client, Wealthsimple offer a Portfolio Review Service. The portfolio review service allows you to send your investment statements to an advisor at Wealthsimple (a real human) who will review your investment strategy and the fees that you are paying. You do not have to be a client to receive this service and there is no obligation to become a client. It is a completely free service.
There are humans that you can speak to about your portfolio too. In fact, if you wish to change your risk profile you will likely be forced to speak to a human so that they can fulfil their regulatory duties of ensuring they are comfortable that your risk level is suitable.
Wealthsimple are currently offering a sign-up incentive where they will manage your first £5,000 for free for your first year so that you can try out their service. Of course, we would always recommend a long-term investment strategy, and Wealthsimple is designed for the long term, so you shouldn’t use the year to evaluate performance as such. But… it’s nice to test whether you like their user experience and interface and test out their customer service, etc. Plus it’s always nice to get something for free for a little while.
If you invest up to £100k, you will pay 0.7% in management fees per year. So you will pay approximately £7 per year per £1,000 invested. If you invest more than £100k, the fees reduce to 0.5%.
On top of management fees, you should be aware that you will also be charged fees by the underlying funds that you are invested in. These come to a combined fee of approximately 0.2% per year. This number will change depending on your exact portfolio. The nice thing is that there is a downward trend in the fees charged on passive investment funds, so you may even see this come down over time.
Fees are an incredibly important feature for you to evaluate when selecting an investment portfolio. Fees have been proven to be the single best indicator of fund performance - the lower the fees, the better the fund performs. Wealthsimple’s fees are fairly in-line with other European robo-advisors (platforms in the US are quite a bit cheaper). For a cheaper alternative, you may want to check-out Vanguard’s LifeStrategy Funds (0.22% management fees). Vanguard are the kings of passive investing and are industry leaders in terms of how cheap they are. However, Vanguard is more DIY and you may find Vanguard to be less slick and less easy-to-understand compared to Wealthsimple’s offering.
There are two core risks to your investments - firstly there is market risk (so the risk that your investments will lose value) and secondly there is platform risk (the risk that Wealthsimple will go bust or mess up).
When it comes to the market risk - Wealthsimple will take you through a risk profile questionnaire when you first onboard with them. This will help you to understand the risks involved in your investment portfolio and to ensure you are comfortable with the risk you are taking. Your investments almost certainly will go down at some point and it’s likely you will see your investments go down on 50% of the days you look at it. This is a LONG TERM investment strategy and should be evaluated as such. If you feel uncomfortable with the risks of investing your money in stocks and bonds, you should consider keeping your savings in cash accounts. You may find our useful.
When it comes to platforms risk (i.e., the risks involved in investing through Wealthsimple) there are a few things you should consider. Firstly, this is still a relatively new company and many Robo-Advisors out there are not actually turning a profit, which increases the risk that the business will fail. Perhaps of some comfort - Wealthsimple have so far received $165 million in funding so far. They are backed by , a large financial holding company. Even if Wealthsimple did go bust, your investments should be largely unaffected. When you invest with Wealthsimple, your assets are actually held by SEI Investments (Europe) Ltd., Wealthsimple's UK custodial broker. It may take you a little longer, but you should be able to get your money out.
Wealthsimple do not have a minimum investment amount, which is fairly unique amongst the UK Robos, and they currently offer three different account types:
Accounts can be opened online. The signup process is well-designed, simple and quick to get through (less than 5 minutes, even if you are thinking fairly deeply about your answers). You will be asked a series of questions about your financial situation, investing knowledge and risk tolerance and Wealthsimple will then recommend a portfolio to you based on your answers. You can tweak this as you like and can speak to an actual human if you’d like to discuss it further. One downside is that once you’ve gone through the signup process and selected a portfolio, you don’t appear to be able to review this portfolio again until you go back through and open an actual account.
You can fund your account using a card payment, a direct debit, a bank transfer or by transferring an ISA over to Wealthsimple. Once you have funded your account, you should be able to see your portfolio and investments within 48 hours.
Wealthsimple are offering to pay any fees associated with transferring your ISAs into their service. This is good news and means that Wealthsimple will help you through the process and you won’t be hit with any nasty fees.
It’s pretty easy to withdraw money from your account. What’s nice about Robo-Advisors is that they are typically invested in funds which can be traded daily, so you are not locked in for any significant amount of time. You can ask for a withdrawal online from your account dashboard and you should receive your money within seven working days.
Annoyingly, if you want to close your account completely you will need to email or call them and an advisor will help you through the stages.
Wealthsimple are new to the UK and cannot publish their performance until they have been here for 12 months. That said, the performance of Wealthsimple’s portfolios will simply be a function of the risk level you have selected based on your personal investment objectives and risk tolerance and the performance of the asset classes used to construct your portfolio (global stocks, government bonds and corporate bonds). For investment strategies that are static and passive, it doesn’t make much sense to compare the performance of one provider versus another, as the provider is not trying to use some special skill to outperform the market. Instead, investors should be comfortable that portfolios are well-diversified and that they are comfortable with the risk level they are taking and that they are achieving the strategy at a low-cost. Fees will ultimately be the key differentiator between passive providers.
If you invest more than £100k, you get airport lounge access via. Priority Pass.