An interview with Wealthsimple: Part 1

At Weathsimple, that portfolio manager is David Nugent, and we recently sat down to discuss the firm’s advice model and investment strategy. Here’s the first part of our interview:

The first step in building a client’s portfolio is determining an appropriate asset allocation. How do you do that?

DN: The first step is a 10-question risk assessment clients do online when they sign up for an account. After that they book a call with me—or, as we grow, someone else on our team. We try to get an understanding of their past investing experience and any biases they might have, and then we talk about the asset mix. The real conversation happens over the phone.

Surprisingly, we’re more likely to see people increase their risk level after the phone call. The online risk assessment looks at two things: your ability to take risk, and your willingness. But there are some things that don’t get picked up in the risk questionnaire, like the way they understand fixed income and interest rates. So we have to really talk to these clients on the phone or through a video conference to get an understanding of exactly what makes them tick, and how we should construct the portfolio for them. I give them a sense of what each asset allocation might provide over the long term in terms of volatility, and we try to match that with their comfort level.

What else do you discuss during that initial phone call?

DN: We spend a lot of time on the phone discussing which type of account they should use. A lot of people still have a difficult time determining whether they should use an RRSP or a TFSA, or a joint non-registered account. There’s obviously no right or wrong answer: it depends entirely on your personal situation. But we look at what account they’re trying to open, and what types of accounts they currently have set up elsewhere, and help them determine whether that’s right for them.

It’s amazing to see how many people default to a non-registered account when they don’t have an RRSP or a TFSA open. So the first question is often, why are you investing in a non-registered account when you have all of this contribution room? It’s really just a matter of educating them about the other types of accounts, and then we come to some conclusion about what is right for them given their goals.

For example, a lot of professionals are saving up to buy that first home, so we will educate them about the merits of the Home Buyers’ Plan, because a lot of people assume taking money out of an RRSP is always fully taxable. The account selection has actually proven to be the most important area in terms of what the clients are getting out of the call: how to use each vehicle to maximize tax efficiency.

What is the range of asset mixes you offer?

DN: Our most conservative portfolio is 70% fixed income and 30% equities, and our most aggressive portfolio is 90% equities and 10% fixed income. One of the things we’re big on is risk-adjusted returns, so having some amount of fixed income in the portfolio really does add a lot of value over the long term, even though some investors think we should offer a 100% equity portfolio.

On the other end of the spectrum are people who are very conservative and much more tilted toward fixed income. But once you get to a portfolio that is more than about 70% fixed income the question really becomes, is it better to just own some GICs as opposed to the fixed income ETFs we use? If someone says they want a portfolio that is fully fixed income, our response is that maybe giving us your whole portfolio is not the answer. Maybe it makes sense to buy some GICs with the fixed income part and just give us the equity part.

You describe your model as “light service.” Can you explain what that means?

DN: With my background as an adviser with RBC Dominion Securities, my role was giving advice to clients, so we are able to provide that same service. But it is an on-demand service, as opposed to a full-service model. Typically with a full-service model you speak to your adviser once a quarter, or semiannually, or annually depending on your relationship. At Wealthsimple, if you want to talk to me or someone on our team, you simply log into your account and schedule a call. Then we can review the portfolio, we can talk about buying your first house, we can talk about your retirement goals. But the onus is on the client to schedule the call, as opposed to the full-service model where the onus is supposed to be on the adviser.

One of the issues many people have with their advisers is they don’t understand the performance reporting. Our reporting is super simple: when you log into your dashboard you see how much money you put in, what the portfolio is worth today, the fees you have paid, and the return in both percentage and dollar terms. Those are often the questions people are asking, so we think we can use the technology to answer many of those questions. That will allow our advisers to actually spend time giving advice—trying to figure out the best accounts to use, trying to structure a savings plan, helping them save for a house or an engagement ring. Those are the things we think advisers should be spending time on, and we think everything else can be automated with technology.

READ: Part 2 »

In the next installment of our interview, David Nugent explains more about Wealthsimple’s investment strategy.