How does Wealthsimple make money?

By   |   Verified by Nikita Sheth   |   Updated 10th November 2021

How Wealthsimple makes money
  • How can Wealthsimple make money when so much of their service is free?
  • Get the lowdown on their business model and how it lets them generate revenue.
  • See competitors and how they plan to grow their business in the future.

Wealthsimple offers a commission-free trading platform for buying and selling stocks, ETFs, and other investment products in Canada.

Given they allow traders to place orders for free, many have questioned how they can possibly make money. Get the answer in our explanation of their business model.

What does Wealthsimple do?

Wealthsimple is a trading platform offering millennial investors the chance to grow their wealth. Founded by Michael Katchen in September 2014, Wealthsimple offers a low-cost, user-friendly brokerage offering a limited but effective strategy for investing on the consumer's behalf.

The Toronto startup saw significant success, becoming the largest fintech company in Canada, with more than 150,000 clients and over $5 billion in Assets Under Management (AUM). The company manages operations from its offices in New York and London, catering primarily to the Canadian, US, and UK markets.

Wealthsimple is a subsidiary of the Power Corporation of Canada, and Power Financial has over $470-billion in AUM.

How does Wealthsimple work?

Wealthsimple is an online platform offering investors trading and robo-advisory services. If you're not comfortable managing your investments yourself, Wealthsimple makes investing easy through its robo-advisory.

The company offers users the opportunity to invest their portfolio directly or have its robo-advisors allocate capital for them. Regardless of which strategy you choose, the company charges some of the lowest management fees for allocating your capital and growing your wealth.

The company is the only firm in Canada offering zero commissions on trades. As a result, day traders can choose from a range of stocks and ETFs to buy and sell without the worry of fees eating into their profits.

Wealthsimple offers investors both a hands-off or active investment experience; the choice you take is up to you. Recently, Wealthsimple also launched its Wealthsimple Cash product, giving customers access to a checking account and a dedicated debit card for spending.

How Wealthsimple makes money

Wealthsimple makes money by charging currency exchange fees when users deposit funds to trade with, payment processing fees when Wealthsimple Cash users spend with their card, payment for order flow, and fees charged for access to their robo-managed ETFs.

Currency exchange fees

Wealthsimple makes the bulk of its revenues through currency exchange fees. When investors want to deposit CAD or GBR into accounts to trade American markets, Wealthsimple charges a conversion fee so the trader can process orders in USD.

Wealthsimple charges a 1.5% currency exchange fee on all GBR and CAD / US conversions and again when returning the account funds to the user in their local currency.

Wealthsimple Cash

This division of the Wealthsimple business model, offering users a banking experience with 0.75% APR on positive balances and no minimum deposit. Wealthsimple Cash gives users unlimited transactions and no fees, including no monthly account fees, no transaction fees, and no exchange fees on foreign transactions.

Wealthsimple Cash offers direct salary deposits, with Interac e-transfers, no-fee bill payments, and services to move money between RRSP, TFSA, or other investment accounts. The company also plans to launch a Visa debit card to help its users spend directly out of their Wealthsimple Cash account.

Wealthsimple intends to collect transaction fee royalties from Visa every time one of their customers swipes their Wealthsimple debit card to make a purchase. As a result, the company collects these interchange fees, adding a new revenue stream to its already impressive model.

Wealthsimple Trade

Wealthsimple Trade offers traders a range of stocks and ETFs to invest in without paying any commissions. The commission-free model might look good on the surface, but the reality is that the customer does end up paying for the costs of their trading through poorer execution.

Wealthsimple engages in payment for order flow practices. Essentially, the company routes its customer order flow through another high-frequency trading firm (HFT) or financial institution such as a bank.

These "market makers" arbitrage the purchase in a nanosecond, making a tiny profit on processing the sale. They then share these profits with a commission to Wealthsimple for facilitating the order flow. Some experts argue this process adds liquidity to the market, while others state it's an unethical practice.

The reality is, Wealthsimple doesn't make any money charging commissions on stock and ETF trades.

Wealthsimple Invest

This division is the robo-advisory service offered by Wealthsimple. With Wealthsimple Invest, customers can take a hands-off approach to their investing strategy.

If you don't have the knowledge and skills to trade stocks and ETFs for yourself, Wealthsimple has algorithms that know what they are doing. The Wealthsimple robo-advisory service allocates clients' capital into pre-built portfolios designed by a team of top investment managers.

The robo-advisory has the bots do the trading for them, ensuring you get a decent return out of your capital that's in line with what you can expect from mutual funds and retirement accounts.

However, you pay much lower fees than investing through a traditional IRA or managed fund. Instead of paying around 2% to the firm, you only pay 0.5% with Wealthsimple and 0.4% if you have a balance with more than $1000,000 available.

Wealthsimple also charges for accessing its ETFs, with fees ranging from 0.2% to 0.4%, depending on the investment. As a result, the average Wealthsimple investor ends up paying around $350 in fees per year for Wealthsimple managing a $50,000 portfolio. Still, that's much less than the client would pay using a broker-based TF or MF managed fund. Wealthsimple clients benefit from low fees and full management of their investment strategy.

Future growth engine

Wealthsimple wants to continue its rapid growth in the US, Canadian, and UK markets.

The company continues to innovate its business model with its move into the consumer banking market.

Wealthsimple's goal is to expand its customer transactions with its payment partners, boosting its interchange fee business revenues.

Competitors

Some of Wealthsimple's top competitors in Canada include leading fintech and financial firms offering trading platforms and investment services.

  • iQuant
  • CIBC Mellon
  • MoneyFarm
  • Ethic
  • FutureAdvisor

They also compete with the likes of SoFi and M1 Finance in the US market and Revolut, Starling, and Monzo in the UK.

Tech giants including Apple, Facebook, and Google are also moving into the consumer finance space, bolting on banking as a feature to keep their users engaged with their respective ecosystems.