A tense and formidable standoff ensnares Wealthsimple, OPM Wire, and The Globe

Wealthsimple is employing some Trumpian exaggeration tactics

The Globe and Mail covered similar ground yesterday, but added the following sentence: “It [Wealthsimple] claims to have over one million Canadian clients who use 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”:

Wealthsimple is employing some Trumpian exaggeration tactics

Let’s look into this “million” claim. Wealthsimple claimed $5 billion in AUM and 175k clients for much of the latter half of 2019, not 1 million. However, by the end of 2019, Wealthsimple had changed the formula to claim that a million people use their products. How did it accomplish this? Using standard financial industry hocus pocus.

They took their investment clients and added several hundred thousand SimpleTax customers. SimpleTax is the online DIY tax filing service they purchased in September 2019. The claim is dubious, because 800,000 Canadians do not file their taxes in December, so they are not “using” the product. In the past tense, it would be more accurate.

Even referring to SimpleTax as a “Wealthsimple product” is a stretch, given that it was a completely independent startup until the September acquisition. SimpleTax has not had a single tax season under Wealthsimple’s control. Furthermore, assuming that the vast majority of the 800,000 or so previous SimpleTax tax filers will return for the eventual 2020 tax season is a forward-looking statement.

The use of the present tense is again questionable. One point in favor of Wealthsimple’s interpretation is that tax filers typically use the same service from year to year, and tax software typically saves data from previous years in between.

However, this would be misinterpreting clients’ endorsements of SimpleTax as endorsements of Wealthsimple products. Whether the clients like it or not, Wealthsimple now has access to SimpleTax user data. These are contentious claims, and I’ll let you decide where the truth lies.

And whether The Globe should do them a public relations favor by repeating that claim when their own archives from a few weeks ago show the 175k figure is another question. Is it really necessary for Wealthsimple to employ these “as if” strategies? OPM Wire has amassed a million+ readers in just three months, but you never hear me brag about it, do you? To be completely honest: I recently obtained a Nigerian Prince’s mailing list.

Consider the AUM figure of $5 billion, which is now available on their website. That figure has been revised to $6 billion (to include the $1 billion in the Wealthsimple for Advisors division, which will be spun off in 2020).

So the figure of $6 billion compares to $3.4 billion at the end of 2018 and $1.7 billion at the end of 2017. So, in its fifth year, the firm has grown 76%, a slowdown from the previous 100% growth. These are reasonable hypergrowth rates (Shopify, a true rocketship, was growing at a rate of around 90% even in its tenth year). However, the growth rate should be analyzed with the following caveats in mind:

-2019 saw bullish conditions, with both stocks and bonds rising significantly (stocks up 30%, figure bonds alone). This provides a natural tailwind in terms of both inflows and asset marking up.

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

-the growth rate does not account for fee erosion…

US robos are already at 25 basis points. Questrade already charges 25 basis points in Canada.

According to Paul Desmarais III, Wealthsimple clients start small but add about $1k per month to their accounts. This growth dynamic is already embedded in the 76% growth figure, which I thought was a significant positive for my analysis. In the future, you must account for a bear market, increased 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 more recent products have even worse economics. SimpleTax operates on a “pay what you want” basis. Even someone with a stone heart would pay their suggested contribution when it was an independent shop (they tug at your heartstrings by showing pictures of their employees near the end).

Why would you care about enriching the Desmarais now that it’s in Power’s hands? When you factor in free brokerage, free bank accounts, and other perks, Wealthsimple will have a lot to prove in 2020, which will be a Path to Profitability year for startups.

Most unicorns on a genuine hypergrowth path that I’ve followed are tight-lipped about their IPO plans. Wealthsimple emphasized its IPO prospects this year, despite the fact that, in my opinion, they are not on a path to IPO (not a well-received one, at least).

Could this be due to the fact that Wealthsimple, almost uniquely among startups, has already handed over control to one of its natural acquirers? Could the IPO spin be intended primarily for internal consumption in order to incentivize employees?

Wealthsimple touted its partnership with an Ultra High Net Worth firm in August, but only a few months later, it is spinning off the division in charge of that. In 2017, Mike Katchen stated that Blackrock had reached a trillion in assets in 18 years and that he was on track to do so in 15 years. To increase from $5 billion to $1 trillion in the next ten years, annual growth rates of 70% are required. I don’t think they’re on track to meet that target, at least not organically.

Having said that, I have a high regard for Wealthsimple’s management team’s ability to execute. Wealthsimple and other startups should not be analyzed in a static manner. If someone in the 1990s analyzed Amazon as a mere bookseller using assumptions of the time’s delivery logistics, they’d look pretty silly now.

The only people who should be offended by my coverage are the robo-advisers I don’t cover. Excuse me, but I couldn’t get out of bed if I had to write an article about Justwealth. Let’s hope they’re not backed by anyone powerful. I must choose my battles carefully. Finally, keep in mind that I am an external analyst for a private company making assumptions, so my interpretation of the million user claim may be incorrect.

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