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Wealthsimple co-founder Michael Katchen at his office in Toronto in 2017.Nathan Denette/The Canadian Press

Every startup has an origin story, a tale that illustrates its core principles. For Wealthsimple, that meant promoting low-fee, passive investing.

After selling his first business about a decade ago, Wealthsimple co-founder Michael Katchen constructed a simple portfolio of exchange-traded funds using Microsoft Excel, then told the friends with whom he cashed out that this approach was the best way to invest their money.

The underlying premise: It’s tough to outperform the market over the long run, so for most people it’s better to invest in a mix of low-cost ETFs and ride the wave.

“The feedback I got from my friends was, ‘Mike, we’re lazy. We love the system, but can you just please do it for us?’ ” Mr. Katchen told The Globe and Mail in 2016. “And they became the first 10 clients of Wealthsimple.”

The concept proved popular with the millennial crowd, attracting billions of dollars in assets to Wealthsimple’s so-called robo-adviser, and the company went so far as to buy Super Bowl ads preaching “simple automated investing.” In no time, Wealthsimple had so much buzz that people started to wonder if it would take down Bay Street’s old guard.

Lately, so much of that seems like a past life. The company’s automated platform still exists, but Wealthsimple is now advertising a trading app for retail investors. And it’s not just stocks – it is heavily promoting its new cryptocurrency business, which allows users to trade a slew of crypto assets.

The new strategy seems at odds with Wealthsimple’s founding principles, particularly so with crypto, which is highly volatile and has some of the highest trading fees around. In a recent speech, Gary Gensler, the new head of the U.S. Securities and Exchange Commission, called the crypto market the Wild West, “rife with fraud, scams and abuse.” China recently made all crypto transactions illegal.

Despite the hard pivot, Wealthsimple has said little about its change of heart. When asked about the new strategy, no one was willing to be interviewed. Instead, the company sent e-mails explaining that it is diversifying to target different client segments.

“Our mission is to help everyone achieve financial freedom, no matter who they are or how much they have. That mission hasn’t changed. We are a fast growing company building a full financial ecosystem for our clients across their savings, investing, spending, tax and crypto needs,” Mr. Katchen wrote.

As for crypto’s volatility, which prompted the SEC chair to call it a “highly speculative asset class,” Mr. Katchen does not believe that disqualifies it from inclusion in a well-rounded portfolio. Wealthsimple, he wrote, is “very comfortable recommending that our clients put their money in diversified, low-cost portfolios, while also supporting them if they wish to invest in particular companies or promising new technology.” He also said that Wealthsimple is the first crypto platform to be regulated by a securities authority in Canada.

What is happening at Wealthsimple is playing out in a similar fashion across the robo-adviser industry. Once-popular rivals in the United States, including Wealthfront and Betterment, are facing existential crises of their own. For all the billions of dollars that robo-advisers manage, it often isn’t enough to turn a profit. Betterment’s CEO stepped down last December, and its new leader acknowledged that an initial public offering likely was not possible until the company started making money.

“These businesses operate on very tight margins. They just have extremely low fees, therefore they have to achieve pretty large scale before they’re profitable,” said David Goldstone, head of research and analytics at Backend Benchmarking, which tracks the robo-adviser market, in an interview.

Even if a robo-adviser brings in tens of millions of dollars a year in revenue by charging around 0.5 per cent annually, the company has to spend heavily to attract new clients. “There was an industry-wide underestimation of how much it was going to cost to acquire customers,” Mr. Goldstone added.

Compounding the problem, the old guard woke up and launched robo-advisers of their own. In the U.S., Vanguard and Charles Schwab now dominate the market, with assets worth US$210-billion and US$60-billion, respectively, at the end of 2020. Betterment, the largest independent robo-adviser in the U.S., managed US$28-billion at the same date. In Canada, Bank of Montreal launched its SmartFolio robo-adviser in 2016, and Royal Bank of Canada followed suit in 2018.

The incumbents aren’t simply more competition – they have a structural advantage, because they can cross-sell their robo-platforms to existing clients, lowering their customer-acquisition costs.

To adjust, Wealthsimple started diversifying in 2018 with a high-interest savings account, then added Wealthsimple Trade, which allows users to buy and sell stocks. In the fall of 2019, the company acquired software maker Simpletax. And a few months later it launched Wealthsimple Cash, a hybrid of a no-fee chequing account and a high-interest savings account.

The pivot to crypto started in August, 2020, when Wealthsimple’s users were permitted to start trading Bitcoin and Ether. This past June, trading expanded to 14 additional crypto assets, including Litecoin and Dogecoin.

Wealthsimple does not break down its assets by division, but retail trading and crypto are what makes Silicon Valley salivate. Last fall, Wealthsimple raised $114-million in a funding round that valued the company at $1.4-billion. In May, it raised another $750-million, boosting its valuation to $5-billion only seven months later.

Retail trading app Robinhood and crypto trading hub Coinbase recently went public in the United States, and their financial statements illustrate just how explosive retail trading revenue growth can be, particularly in crypto. At Robinhood, crypto brought in US$320-million in the first half of 2021, compared with just US$10-million in the first half of 2020.

To understand what that could mean for Wealthsimple, simply look at the fee schedule. The company’s robo-clients often pay 0.5 per cent annually, while crypto traders pay 1.5 per cent to 2 per cent per transaction (although Wealthsimple must split that fee with other parties).

Stock trading and crypto are also popular with younger users, which has always been Wealthsimple’s target market but proved to be a tough nut to crack.

Even though the company attracted billions in assets, it was a tiny fraction of the total wealth-management market. Switching rates, which measure the likelihood that someone is willing to leave their main financial institution, remain stubbornly low. In 2020, management consultancy Accenture pegged the switching rate for a primary financial account in Canada at only 4 per cent.

Yet as the company grows, it seems inevitable that it will move further from its roots – some of which are still exposed on Wealthsimple’s website. In a section promoting its robo-adviser, the company writes: “History shows that when you try to predict the future – by picking stocks, for example – rather than investing in a highly diversified way, you are more likely to underperform the market.”

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