Simplifying digital investing: An interview with Dave Nugent, CIO, Wealthsimple

22 August 2017

By Taryn Shulman

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Earlier this year, Canadian Prime Minister Justin Trudeau recognized Weathsimple as a true Canadian success story. The company recently reached $1B in assets and secured a new investment of $50M — exciting news for a company that is not quite three years old. We caught up with Wealthsimple’s Chief Investment Officer, Dave Nugent, earlier this month to talk about the world of digital investing and to see, first hand, why they’re turning heads all over the world.


Taryn Shulman (Q4): I see your ads all over the city [Toronto] and follow you on social and in the news. But for those who may not be fully versed in Wealthsimple, can you provide us with a quick overview of who you are and what you do?

Dave Nugent (DN): Wealthsimple is a digital investing service that makes investing simple and accessible, regardless of age or net worth. We were founded three years ago in Canada, where we’re now the market leader with an 80 percent share of clients in the robo-advisory space. 

Our core B2C service enables individual clients to invest in a diversified portfolio of ETFs, with no account minimum and low fees. We also have a B2B product, Wealthsimple for Advisors, that helps financial advisors manage and scale their business through our technology platform. We currently manage over $1B for more than 35,000 people, most of them younger investors in the 25-45 age bracket.

 

Q4: With robo investing trending up, how does Wealthsimple differ from other robo advisors?

DN: We’re very focused on our clients. Their needs and preferences drive everything we do. We provide our clients with a hybrid service, meaning: our clients have the option to manage their accounts directly through our website (which won Best Financial Website in both 2016 and 2017) and app, but can also talk with a qualified financial expert whenever they want. We want people to be in control of their finances, which is why we ‘get personal’. We make recommendations based on an individual’s goals, timeframe, investment experience and risk. We want to enable them to make the best decisions and live their best financial lives.

We also have the advantage of operating like a startup, but with the backing of a major financial institution (We’ve raised $100 million from Power Financial, one of the largest financial holding companies in the world). When people are investing, they want to know a company is going to be around. We provide that security, while being able to innovate and iterate at the pace of a startup.


Q4: Can you talk to the fundamental operational differences between active and passive funds?

DN: Passive investing is designed to track the market as a whole rather than trying to predict the “winners.” The data show time and time again that most active managers fail to consistently outperform the market, but the market as a whole gains value over the long term. And tracking the index rather than picking stocks enables us to keep fees low, which has a very significant impact on investors’ portfolios over time.


Q4: Robo investing has really disrupted the traditional investment community. What percentage of investing in equities is done this way and how much do you expect to grow in the coming years?

DN: Despite the fast growth of automated investing services like Wealthsimple, it’s still a really small market. For example, there is something like $3 trillion in investable assets in Canada, and robo-advisors manage less than $2 billion of that. The market is a little more mature in the US, but still a tiny fraction of the overall investing space. Clearly there is a lot of room to grow this segment of the market, and we expect it to grow considerably, driven by a couple key factors. The first is regulatory: we’re undergoing a global regulatory shift right now that is demanding more transparency and accountability from the industry. The fiduciary rule in the US and CRM2 in Canada are good examples of this. The industry is required to disclose more, and individual investors are more aware of the fees they’re paying and the service they’re receiving for these fees. Another is technology: it goes without saying that technology is playing a bigger and bigger role in virtually every service we use and wealth management is no exception. The new generation of investors wants to be able to manage their portfolio from their smartphone, the same way they order lunch or call a cab.


Q4: How does your algorithm change over time? How do you recognize complete shifts of ideas in the market rather than investing opportunities? For example, retail has really been beat up lately by Amazon. How do AI-type investing platforms recognize the difference between opportunities and free fall?

DN: Humans — and not algorithms — make the decisions about our investment strategy. The assets we include in and exclude from our portfolios are determined by our investment committee, made up of very experienced investors. What we use algorithms for is to optimize our clients’ portfolios. For example, an algorithm compares our clients’ model portfolio to their actual portfolio daily, and rebalances it when it drifts from its target allocations.


Q4: Do you have any thoughts on what growth in robo investing means in terms of overall market volatility/holding patterns?

DN: There is some truth to claims that passive investing makes markets less efficient. According to academic research, this potentially takes the form of slightly higher transaction costs, higher correlations, and reduced sensitivity of share prices to earnings. But it’s important to keep in mind that the magnitude of these effects are relatively small, and are likely to remain small. Slightly higher transaction costs are marginal compared with the fees charged by most active managers — making passive investing still very compelling for the average investor. Overall, it’s a minor price to pay for making passive investing vastly more accessible to the average person.


Q4: Some people fear the “rise of machines” in the capital markets. Do you see any reason to fear or what could potentially be a downfall(s) to all this passively-managed money as opposed to actively managed accounts?

DN: We really don’t. If there were, say, a run on ETFs, where does all that money flow? If an investor decided to go from a passive to an active strategy, a lot of the money would still be invested in the same companies. A typical active manager is going to advise that you invest in, for example, a lot of the same S&P 500 companies that you’re investing in with your ETF-based portfolio.


Q4: What’s next for Wealthsimple?

DN: We’re about to launch in the UK so that’s the next big move for us. We’ll be focused on that launch in the next couple months, as well as continuing to grow our business in Canada and the US.

 

Taryn Shulman is Director, Marketing at Q4, and is a regular contributor to Q4 blog.

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