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How Does Wealthsimple Make Money? – Business Model Explained

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Wealthsimple is one of Canada’s leading discount brokerages. The question “How does Wealthsimple make money?” is a valid one, because unlike any other online brokerage in Canada, Wealthsimple doesn’t charge any commissions for buying or selling stocks and exchange traded funds (ETFs).

Known as the commission free trading platform, Wealthsimple has built its assets under management (AUM) portfolio to over $15 billion and has picked up a few awards along the way. It’s a great platform for beginning investors who are looking to reach financial freedom through investing.

But how does Wealthsimple make money? The company has broken up its financial products under different functions, each one with its own way to generate revenue. Here are a few way this online brokerage makes money aside from trade commissions.

Wealthsimple logo

 

Wealthsimple Trade and Wealthsimple Crypto

For the experienced investor who is comfortable managing their own portfolio, Wealthsimple Trade offers no commission to trade stocks and ETFs, some which track big index funds. No commission doesn’t mean no additional fees. Even with no commissions, holders of ETFs still have management fees to pay, although these are not collected by Wealthsimple.

However, self-directed cryptocurrency trading doesn’t fall under this commission-free scheme. Wealthsimple charges crypto trades based on the bid-ask spread or a maximum of 2%, whichever is lower.

In order to make trades in foreign markets (outside of the Canadian stock market), Wealthsimple charges a conversion fee. If someone wanted to invest in the NYSE or US based mutual funds, they would have to convert from Canadian dollars to a USD account to begin trading.

These currency conversion fees are charged whenever transactions are made to convert from CAD to USD or vice versa and are based on the current exchange rate.

Wealthsimple charges a conversion fee of 1.5% per transaction. This is still a decent deal for beginning investors who want to dabble in controlling their portfolios, but don’t want to pay the extra fees (like transaction fees up to $10 per trade) they would have to pay with other discount brokers.

Wealthsimple Trade only offers three different account types to hold portfolios in: personal, TFSAs, and RRSPs in CAD. It does offer added services to those who pay for the premium Wealthsimple Trade Plus, where Wealthsimple makes money off of a $10/monthly fee that allows the accounts to hold balances in USD.

The advantage in this is that there are no additional foreign exchange fees to use USD to purchase stocks or ETFs.

Wealthsimple Invest

Designed for the person who prefers a passive investment strategy, Wealthsimple Invest is a robo advisor that helps investors choose where to invest the funds automatically. The robo advisor will invest in a portfolio of ETFs and diversify them based on each individual’s risk tolerance and investment horizon.

The ETFs are selected after a short quiz which assess if the investor prefers growth, a balanced portfolio, or a conservative portfolio, as well as socially responsible investment options (SRI). These portfolios can be allocated to different types of accounts like tax fee savings accounts (TFSA), registered retirement savings plans (RRSP), and others.

One of the ways Wealthsimple makes money through this service is by charging management fees for management of the portfolio. There are three different Wealthsimple Invest account tiers: A Basic account ($0-$100,000) is charged a 0.5% management fee, while a Black ($100,000+) or Generation ($500,000+) account has a 20% discount at a 0.4% management fee.

The difference between the Black and Generation accounts are the benefits and additional services offered by Wealthsimple Invest such as access to financial advisors. The management fees hike up the management expense ratio (MER) on ETFs which have an average of ~0.2%.

Socially responsible investments come in a little higher. Depending on the diversification of the investment portfolios and quantity and type of ETFs in it, the actual MER may be as high as 0.7%.

Wealthsimple Cash

Wealthsimple Cash is an app that allows users to send and receive money instantly without transaction fees or exchange fees for foreign transactions (except for the conversion fees). It’s a free app that only requires opening a Wealthsimple Cash account.

Wealthsimple Cash and the Wealthsimple Cash Card are both free to its users, meaning no account minimums, monthly fees, or annual fees. It helps Wealthsimple generate revenue by charging any merchant that uses it interchange fees of 1% of the transaction.

The card itself is a prepaid Visa debit card that users can upload money onto and use it to pay vendors anywhere Visa cards are accepted.

Interest

For those looking to keep their money in a bank account, Wealthsimple offers high yield savings accounts that allows its clients to earn higher than market rate interest on the money kept in there. It then lends the money to financial institutions at a higher rate, allowing it to turn a profit on the difference between the two.

To Summarize Everything

The way the Wealthsimple business model is structured allows Wealthsimple to generate revenue despite offering a commission free trading platform to its users. The Wealthsimple app allows users to easily manage their portfolios and transfer funds into the account.

  • Wealthsimple Trade makes money through charging a conversion fee from CAD to USD when making foreign transactions to invest in the US market. In addition, Wealthsimple makes money from management fees for ETFs that are in a user’s portfolio.
  • Wealthsimple Invest charges a management fee depending on the account minimums for each tier. Investors looking at socially responsible investing may pay a higher fee.
  • Wealthsimple Cash uses its prepaid debit card to generate revenue. The service is free to whoever has a Wealthsimple account, but charges vendors an interchange fee whenever the card is used by a member.
  • Wealthsimple offers a high yield savings account to its users and in turn lends the cash deposited into the account to any financial institution that wants it at a higher rate.