It’s never been easier for Canadians to invest online, but does automate investing spell the end of the human investment adviser? My guest this week doesn’t think so. Michael Allen is the portfolio manager at Wealthsimple. Michael has worked in the investment industry for more than 13 years, including the past five with Wealthsimple. Michael joins me to dispel some myths surrounding robo-investing and explain the recent surge of new investors in the current down market.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Our sponsor, Wealthsimple, believes financial independence should be available to anyone. That’s why they have no account minimums. You can get started investing for as little as one dollar. Don’t delay any longer. Invest online by visiting maplemoney.com/wealthsimple today. Now, let’s chat with Michael…

Tom: Hi, Michael, welcome to the Maple Money Show.

Michael: Thanks, Tom. It’s great to be here.

Tom: Thank you for being on. I want to point out ahead of time that Wealthsimple has been a sponsor of the podcast but is not sponsoring having you on. Similar to the CDIC, I saw an interesting story; Rob Carrack recently put out an article about how Wealthsimple has been doing so far this year and it’s been an interesting year. I want to run through that with you a bit, but first, let’s discuss who you are. What’s your position with Wealthsimple?

Michael: As you mentioned, my name is Michael Allen. I’m a portfolio manager at Wealthsimple. I’m the lead our team of portfolio managers as well. I joined Wealthsimple just over five years ago. Before joining Wealthsimple, I was at one of the bank-owned brokerage firms. I’ve been in the investment business for just over 13 years now. I transitioned over to Wealthsimple five years ago based on the excitement of building something that was much bigger than me. A lot of my clients at that time were younger professionals so I saw a massive opportunity. Michael Ketchum saw it about two years before I saw it and made it go live before I joined. And I’ve been on this journey for the last five years, helping clients do financial plans. Eventually, they started hiring more portfolio managers. Now we have a team of 15 that are on the client-facing side doing financial plans as well as give you advice when it’s needed, especially in turbulent times like what we’ve gone through to date. Our team is really responsible for the advice and making sure clients are developing and also making sure that they’re sticking to those long-term plans.

Tom: And this year has been the biggest test to that. But a myth I wanted to dispel (while you’re here) is that you are not a robot. There there’s a lot of talk about robo-advisors. What is this? Is it just all automated? You just mentioned you’re actually setting up plans with clients and helping them stick to those plans against their inner wants of wanting to get out of the market. I assume you’re talking to a few people off the ledge, technically with investing. Can you just dive into that a little bit? What happens when you work with a client? What is it you’re doing that is human-to-human contact?

Michael: Well, first of all, we don’t like the term robo-advisor because we don’t think that’s what we are. We’re a digital financial advisor. And there’s a big misconception in the investment community and some of the retail public that we don’t have the human touch to something that is actually very human. Our savings and future goals are all very human. At Wealthsimple, we’re just combining smart technology to help keep people disciplined and to help with certain parts of portfolio rebalancing. We’re marrying it with the human aspect of qualified financial advisors that are fiduciaries. Right now, it’s very easy to get started where you can go and do a questionnaire online and if you don’t talk to somebody, you don’t have to. But we find there are a certain set of clients that want to make sure that they’re setting up their portfolios correctly. And the portfolios are complementary to their savings goals so they just want confirmation there. Or maybe they just want to ask someone questions as well such as, “How much home can I purchase? What should my down payment be?” Or, “I’m saving for my kid’s RESP. How do these work? What should I be thinking about?” There are full-blown financial plans we can do as well because we have certified financial planners to help implement those plans. It’s more an on-demand service for clients. So when you need us, we’re there for you. When I was a financial advisor, I had my set of clients that I would take care of where I would proactively reach out and have conversations with. But for many people, financial planners don’t change that often. But when they do, it’s good to be able to talk to somebody and talk through it. We don’t believe clients need that proactive outreach and pay more in fees for that service. Just being available when you do have questions about your situation or updating your plans, that’s what we’re really here to help you with. We’re not saying you’re going to be doing it all by yourself. We’re not saying you have a dedicated advisor that you’re going to pay north of one or one and a half percent for. We’re really just saying, “Here’s a low-cost investment service with the human advice tied into it.”

Tom: I’m not going put you on the spot for an exact stat but even just a feeling… Of the Wealthsimple clients, do you have an idea of how many are actually reaching out and contacting? Or are there a lot of people just happy to sign up and invest in that’s it?

Michael: We have a lot of people that are signing up and investing, and that’s it. But we’re also doing a lot of other types of engagements with clients because we really want to make our clientele smart, long-term investors. We have publications such as our magazine where we interview people about their relationships with money. Those can be famous people like the Kardashians or it could be somebody trying to live off a dollar a week. All of these stories are for people to be able to say, “Can I relate to this person or learn something from their life to improve my personal finances?” We do that through stories. There are other articles we publish that are just more industry knowledge. Even in the last three months, we’ve hosted multiple webinars as well as conference calls with our head of research, Ben Reeves. It just allows people to have an understanding of how these portfolios were constructed; why we still believe in this long-term, passive investment approach. People really just want the confirmation they’re going to be okay over a longer period of time, especially when you’re buying such a diversified basket of investments. It’s not as if they’re always doing it on their own. We want to constantly educate and put relevant content out there for people to get smarter with their investments over time. There is another set of people that really want to use our human advisors. We’re speaking to just over 600, 700 people a week. And that could be anywhere from an initial asset mix of setting up portfolios to a risk for change where something changed in their life. Or it could be updating a financial plan where a person is a little bit nervous about the markets and doesn’t know how that’s going to impact them. They may have lost a job and need to revisit what their overall finances should be. We’re helping people much more holistically and talking to them one-on-one.

Tom: We’re also seeing an increase in sign ups. And this isn’t even Wealthsimple specific. There’s just a lot of people interested in investing while the market’s down, which, by all means, is normally quite smart. I’m just a little surprised. With all these articles out there, there is a lot of fear. What do you think is causing this? Why are people deciding to start investing now?

Michael: I think a lot of people remember 2008, especially the millennial crowd who didn’t have very much money to be able to take advantage of the 2008 situation. They’re saying, “If the markets are down, this is a good time to start deploying some money,” because it’s down. It will eventually just rebound and increase over time. I believe you’re also referring to the Rob Carrick article about the growth in signups we’ve seen in March which was incredible and it still is. It’s almost doubling what we saw in the previous year in signups for that month. It’s incredible. I think it has to do with people getting more comfortable with the whole digital concept, this hybrid between doing it yourself and getting an adviser. Warren Buffett is out there talking about the passive investing solution and fees. There is a lot of education around it now. People are educating themselves so I think that’s a big part of it. Also, just the simplicity of signup, the simplicity and getting of getting started is a lot different now than it was five years ago or even three years ago. Some institutions are still doing it with paperwork where you have to go in and see somebody. And the transfers take forever. People just don’t get around to it because we all live very busy lives. I don’t think there’s one particular reason why. There are just multiple options for retail investors today where those options may not have been available five or 10 years ago.

Tom: Yeah, and right now with this whole Coronavirus pandemic, an online offer looks pretty appealing. Nobody wants to go and stand in line at a bank or book an appointment with a manager at a bank or anything like that when they can just open up their phone and sign up quickly.

Michael: It’s as easy as Uber eats at 9:30 at night instead of at 9:45 or actually having to go to a restaurant. You can order anything online and almost always receive it instantaneously. We’re all getting accustomed to the service being quick and user friendly. And people also want transparency with what they’re looking at as well, “How much is this going to cost? What am I holding? What am I doing?” I think people have much higher expectations from their service providers than ever before when it comes to that.

Tom: One of the knocks I’ve heard in the past against the so-called robo-advisors is wondering why they should pay this extra fee. I think you’ve already covered some of this in that there is someone you can actually talk to. This isn’t just an ETF. There are people behind this. I can see why that fee is lower than mutual funds. It’s just a lot more efficient. As a company, Wealthsimple does not need to pay an adviser to sit down with every single client, fill out those paper forms and mail them in and all that. I can see an efficient business that’s able to offer a low fee. Do I have the idea right? Is this where fees go to?

Michael: I think it’s about fees. I think it’s about the human element. I think there are other considerations as well. Tax efficiency is a big one. For people that have maxed out their RRSPs, Tax Free Savings Accounts– registered accounts; some are starting to invest in non-registered assets whether it’s in corporation or a personal or joint account. You have to start being very mindful of the tax consequence some of these investments will have. There are a couple of ways we deal with that. One way is that we do tax loss harvesting. When an asset is down in value, we take advantage of that by liquidating the asset and moving the capital to another asset that’s similar. That way you can trigger the loss and offset it on any capital gains you may have. The second way we help clients is by thinking about their tax consideration and doing asset allocation. If you have an RSSP, TFSA non-registered account and have a growth portfolio for each one, you’re going to be holding all the same ETFs in each one of those accounts. That’s not very tax efficient. What’s more tax efficient is taking a look at all the accounts together and saying, “If all of all those accounts are going to be used for the same pool, why not just put certain ETFs in certain accounts for tax preferences?” Overall, it’s the same allocation as what you would have had in each individual account but you could be saving a considerable amount of taxes just by doing that. An example would be your US exposure which should be held within your RRSP to save on the tax. That, in itself, could also make up the fee difference between Wealthsimple and another provide. And that doesn’t include any of the other benefits. There are also some more soft benefits. You’re an arm’s reach away from your portfolio. You can do it on your own too. And, by the way, there’s nothing wrong with doing it on your own; buying a broad-based, diversified portfolio and doing it on your own. It takes time and energy. But most importantly, it takes temperament in making sure you can stick through the ups and downs; do regular contributions and also have the time to be able to keep doing the reinvestments in the portfolio’s rebalancing. Putting all of that aside to using a more digital adviser, you’re essentially bringing on us to make sure all of that is done for you. You’re really putting everything on autopilot. That could save you from a mid-March situation where you don’t know what’s happening, the whole world’s crumbling to where you can easily get out of the touch of a button. Or you may have a little bit of friction with a digital service. Say it’s Wealthsimple, for example. You have the ability to bank a thought or an idea off of somebody who’s a professional who has seen these types of downturns. Going through 2008 was probably the greatest education of my life. It’s really just making sure people stick to their long-term financial plans and don’t shoot themselves in the foot by being too concerned about the short-term.

Tom: Yeah, 2008 was eye-opening for me too. I started the Maple Money Show, which started out as The Canadian Finance Blog at the time. Back in 2009, a lot of things were coming together. And that was definitely one of the things that opened my eyes to how this all works and how to reduce fees. I had mutual funds that were somewhere around the two percent range for fees and they were not helping me out at all. The other thing that I’ve had to bounce off people when they complain about robo-advisors is that there are the fees that are going to hurt your returns. And once you have the return, can you beat the index? I’ve always pointed out that the point isn’t to beat the index; it’s to at least match it. And that’s where having a fee much lower than a mutual fund is a given. It’s something that you’re definitely ahead of. Everything is going to go up. Everything’s going to go down. But fees are where you come out ahead. And the other thing in Rob Carrick’s article that kind of shocked me was Wealthsimple portfolios went down just like everyone else but you went down a lot less. That surprised me because I’ve been saying for years that the goal was to match the index. But you actually beat it. It doesn’t surprise me that you beat other portfolios out there that have higher fees, because, again, that’s just in the math. Sometimes that lower fee is going to put you ahead. But what happened that made Wealthsimple beat the indexes on any of your portfolios? I believe you beat the indexes across the board.

Michael: It all boils back down to portfolio construction and how we think about it. We think about portfolio construction more from wealth incomes as opposed to more market cap-weighted indices we’re trying to track. We are looking at all the outcomes, whether it’s for a conservative balance or growth portfolio and trying to avoid the really bad outcomes. But that being said, we do have equity exposure to the broader based index in our portfolio. I was tracking Canada, the US, the International markets that are very broad-based market cap-weighted, ranking the largest companies as the most weight and downwards in the portfolio. Within that equity exposure we also use a different methodology which is more of a minimum volatility methodology. A lot of those companies within that strategy, you’re going to be able to recognize. Whether it’s Johnson & Johnson, McDonald’s or Pepsi, they’re still part of the broader based index but how their rank is different isn’t based on their size of the company. It’s really based on how volatile each one of these stocks is. So you would continue to look at the volatility characteristics and rankings based on those criteria instead. And it should fluctuate less than a more market, cap-weighted, index. Taking a look at it from a risk perspective, what you’re doing is essentially reducing a little bit of the risk on the equity side which allows you to take a little bit more risk on more of the fixed income side. And that would be longer duration bonds, which we have in our portfolio. What we actually saw year to date was that our min-vol strategy, as well as our longer duration bonds, really helped the performance on the downside. Why that happened is really based on the methodology of really focusing on the wealth outcomes clients can expect from their portfolios with us. We think by reducing that level of volatility, which we’ve seen since May, clients will find it easier to stick to their plan. And the amount of clients reaching out trying to talk about what the headlines are reading, especially watching any business network where they’re saying the Dow hasn’t dropped this far since the Great Depression. And they’re talking about points—not necessarily percentage points so you need to put clarity and context behind it all. The clients are a little bit confused but when they’re looking at their portfolios they see that diversification has really helped. And that’s the biggest point. A lot of conventional portfolios limit their diversification. We want to have more and more diversification to help with those fluctuations because we believe that over time, clients stick to their plan and achieve their long-term goals by having less fluctuation.

Tom: Would it be fair to say, with less volatility, maybe later this year, some of these other portfolios could end up higher? I know everyone thinks that sounds like such a great thing but it’s not. Volatility is a problem. If another portfolio goes higher, it could be temporary. Or there could be additional risk involved in even trying to get that. So if you’re less volatile, does that mean that you’re always going to stay a little closer to normal on both sides?

Michael: We think that focusing in on reducing the bad outcomes is the most important part to our clients. This strategy may outperform over the long-term, more market cap weighted strategies. Or it may not. We can’t really predict the future. We don’t know what’s going to happen one, three or five years out. We think that having a broad based diversified, assets… The underlying assets aren’t vastly different than the broader base market cap-weighted ETFs. When we’re taking a look at over the next three years, five years, we don’t know if it’s going to outperform or underperform. But if we focus in on those outcomes for our clients, that’s the most important part. Time will tell. We think having a diversified group of assets allows less fluctuation where it could outperform over time. We’ve been looking at the results in the last few months. Not bragging about it but these are just the stats and the facts of it. We do have to constantly reevaluate it. We have our whole research team looking at our portfolios. We’re not trying to actively change. It’s very passive in nature. We’re taking look for a very long-term perspective.

Tom: Yeah, and not being volatile trumps anything about trying to predict where you are in three to five years anyways. I could probably find some actively managed mutual fund and say, “Oh, look, this one does better.” But it’s almost a fluke. There is so much active trading, higher fees. You could cherry-pick certain things and say, “Yeah, this one worked better,” so I much prefer the slow and steady method where you’re just taking little steps. Nothing’s too aggressive and you’ll end up ahead in the long run.

Michael: And the focus is on the client, their financial plans and what they want to achieve. Even getting back to the mutual fund you talked about earlier, it’s interesting seeing, especially in the 2008 scenario. Having a lot of volatility depends on the mutual funds you’re in but you’ve got to be very cognizant of the fees you’re paying every year, and taking a look at what is under the hood of a lot of these funds as well. If you’re looking at the top 20 or 40 holdings and they essentially just look like the index, which can be called the “closet” index fund and you’re also being charged two and half percent, there is very little value that’s being added. This is more education that’s coming out of “closet” index funds. We’re constantly doing portfolio reviews with clients to ensure they fully understand what they’re holding. There is more of a “buyer beware” mentality when it comes to certain products.

Tom: Speaking of my past with mutual funds, I came out of college as a financial analyst and I knew enough to be dangerous. I had this idea to get these mutual funds and make a great portfolio but in the end, I ended up with a bunch of mutual funds that practically were an index and ETF. Not that it existed at the time, but it was just this idea I thought I was getting all this diversification. In the end I was diversified but paying about two percent or more to do it. It was a real benefit when there were index funds back then at least, if not ETFs. I think this is a great option for a lot of people. Currently, I still invest in ETFs. And one thing you mentioned is something I’ve said on this podcast before too; some people go to a robo-advisor type of option just to take away some of that effort. I used to find rebalancing my portfolio kind of exciting. I was more new to this. But as I get busier and busier, the kids are getting older—paying a fee just to offload that makes a lot of sense to me. Beyond better returns and everything else, I’d just like to know that it is dealt with. And this is coming from someone that’s been living finance for two decades, career-wise. But I’m really thinking about making the switch because I just want to offload that and not have that hassle any more. If nothing else, for a lot of people, it means just getting that done. I’ve said it many times, for someone just looking to start investing it’s a great option for sure. I didn’t invest in my 20s. It just seemed too difficult to sign up for a broker and pick stocks, especially back then. It all seemed way too difficult. This is so much simpler. People can get started, I believe, for $1,000?

Michael: An account can be $1. We don’t want an account minimum because we know that all the other financial institutions have account minimums where clients with $100,000, half a million and sometimes $500 million get this really great service. We wanted to flip that on its head to democratize and demystify this whole complicated financial world for the vast majority of Canadians and now, people living in the US. Just getting started with the dollar allows you to test drive the platform and get a good feel for it to see if it is a good solution. It is also a great option for people that can invest a large lump sum today. I wish I had this option when I was in my early 20s—a student just getting started. I’m sure you have lots of investment stories about how you made really good decisions and other stories where you’ve not made such great decisions. We all have those. And learning those when we’re really young is so powerful because all of that knowledge just compounds over time. So getting people started right now is so important to us—it’s the mission of our company. That was a very long-winded way of saying, “Yes, it’s only a $1.”

Tom: Do I have it right, though, that to move into the regular portfolio side is $1,000? Not that it matters because I still agree that if someone can open an account for a dollar, who cares what their money’s doing.

Michael: No, it’s $1.

Tom: One dollar, period. Okay.

Michael: We can fully diversify that one dollar. It will fluctuate in value but we are one of the very few institutions where we can actually buy fractional shares for clients. And that’s what makes this possible.

Tom: That’s great. There is no better way to get started. Even if you’re just putting $50 a paycheck away or something like that, it’s going to add up so much more at that age than waiting until you’re older like me to get started.

Michael: We need more people like you to keep educating the public. People are taking it more seriously than ever, now. It’s really putting more gas on the fire just to make sure people keep more money in their pockets and live the life they want to live. More and more clients are coming to us not just for retirement goals or a down payment. The goal is financial independence. It’s being able to live the life you want from a financial freedom perspective. That’s more and more the type of conversation we’re having. And I think it’s really cool for all the educators out there. That’s what we’re trying to do as well.

Tom: Well, thanks for being on the show. Can you let people know where they can find you online?

Michael: Yeah. I can be reached at [email protected]. That’s my direct contact. You can also go to wealthsimple.com to poke around, check out our magazine articles. Check out some of our content. We have funny and educating videos. It’s really great to combine entertainment with a traditionally boring topic to get people interested in it. We created this waterfall; five simple rules that you can find on our website as well. It’s something like a five minute video. Check us out. Sign up online. It takes five to eight minutes. But if you’re just waiting to have a conversation and to see if this platform is right for you, I would happily give you a contact and we can go from there. Also, I’m on Twitter. It’s ballen@weathsimple which is my middle initial B, for Brian, put together with Allen to make it simple and that’s my Twitter account. I’m happy to follow whoever and the more followers I have, the better for me.

Tom: We’ll stick those in the show notes. Thanks for being on the show.

Michael: Yeah, it’s been great.

Thank you, Michael, for dispelling some myths around robo-advisors and for showing us how companies like Wealthsimple add the human touch. You can find the show notes for this episode at maplemoney.com/101. Are you a member of the Maple Money Show Facebook community? If not, I’d love to connect with you there. It’s a great place to ask a question or share a recent money win to encourage others. To join, head over to maplemoney.com/community to share with the group. I look forward to seeing back next week when Doc G from Earn and Invest joins the show to discuss what it’s like to lose your money identity when you leave your job. See you then.