TORONTO – Financial services conglomerate Power Financial Corp. (TSX:PWT) is entering the robo-adviser business with an investment of up to $30 million in Toronto-based startup WealthSimple.
Power Financial — which is the parent of Great-West life insurance company (TSX:GWO) and IGM mutual fund group — will invest $10 million now in WealthSimple, with the option to invest another $20 million over the next 12 months. In return, Power Financial will have an undisclosed stake in the online investment manager.
WealthSimple, which launched in September and has secured more than 1,000 clients, will continue to be independently operated.
The online investment manager bills itself as a low-cost alternative to traditional types of investment advisory services and products. While many larger institutions charge as much as 2.5 per cent of a client’s assets in fees, robo-advisers charge as little as 0.3 per cent, depending on the client’s account size.
Robo-advisers, which provide their services exclusively online, use questionnaires to determine investors’ appetites for risk, then invest clients’ assets into portfolios made up of exchange-traded funds (ETFs). The portfolios are rebalanced using algorithms.
Some robo-adviers, including WealthSimple, also have investment advisers available via telephone, text or video chat to answer questions.
Online investment advisers tend to appeal to tech-savvy young professionals who don’t have enough assets to warrant hiring a full-service investment adviser, but don’t want to pay hefty fees for mutual fund products.
Michael Katchen, the company’s founder and chief executive, said 80 per cent of WealthSimple’s clients are under 45.
“We’re really servicing a young, professional demographic that the industry just isn’t serving well today, isn’t catering to, isn’t even interested in,” Katchen said. “We’re just addressing a massive market need.”
But it’s a market that many larger financial institutions would love to have a foothold in.
“We believe in the value of financial advice for everyone and see the WealthSimple model as a way to appeal to under-served segments of the Canadian population like millennials and those with more modest assets,” Power Financial’s vice-president Stephane Lemay said in a statement.
“WealthSimple has been able to reach this market.”
A recent report by Goldman Sachs called “The Future of Finance” that examines the robo-adviser model notes that the platforms are targeting a highly underserved demographic called HENRYs: high earning, not rich yet.
Although young professionals may not have a huge amount of investable assets today, those assets are likely to grow over time.
“While customers of this product may start off with relatively lower account amounts, as they build their wealth there is opportunity for the company to seamlessly bring them to higher-level services,” the report notes.
WealthSimple says the Power Financial investment will allow it to grow its team of technology and financial experts, increase marketing efforts and give it access to a larger roster of investment professionals. The company’s team currently consists of a dozen people.
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