Features | From Pivot Magazine

Boy Wonder

Michael Katchen had a big, simple idea. It’s an investing revolution that’s winning over millennials. Can he beat the big banks, too?

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Michael Katchen (on right) looking inconspicuous at Wealthsimple headquarters, among the staff at their desksKatchen looking typically inconspicuous at Wealthsimple headquarters. (Photographs by Daniel Ehrenworth) 

Wealthsimple has had many offices—a storage closet, an Airbnb rental, a chic co-working space—but there was one that never quite fit its scrappy start-up creation myth: the penthouse of a Bay Street skyscraper. It was the summer of 2015, and a broken water pipe had flooded the company’s usual digs. So the investment management giant Power Financial, Wealthsimple’s biggest backer, offered some spare office space 49 floors above Toronto’s Financial District. For nine months, Wealthsimple’s boyishly charismatic founder, Michael Katchen, and his handful of employees looked like disoriented pupils at an extended take-your-kid-to-work day—a gaggle of twentysomethings in shorts and Birkenstocks sardining themselves into elevators filled with suits and strolling halls lined with Group of Sevens. “We were a rinky-dink little start-up,” says Katchen. “People were like, ‘Who the hell are these kids?’ ”

Nearly three years later, Katchen, now 30, is still a sprightly interloper in Canada’s financial scene, but his company, a digital investing service, is booming. Wealthsimple is, as its name implies, straightforward. On your phone or computer, you answer some basic questions about your finances and savings goals, the company suggests how to invest your money and, if all goes as planned, you sit back and watch your nest egg grow.

PM Justin Trudeau, looking over the shoulder of a Wealthsimple employee, at a computer screenPrime Minister Justin Trudeau’s 2017 visit. (Photo courtesy of Saty + Pratha/ Wealthsimple)

Katchen is betting that most people his age don’t know—or care to know—much more about investing than that. He’s not after seasoned stock pickers with multi-million dollar portfolios; he’s targeting financially illiterate millennials who feel guilty because they know they should invest but don’t. And there are a lot of them: 53 percent of Ontarians between the ages of 18 and 36, for instance, have no investments. Why not? They’re intimidated, they’re paying off debt first, they don’t think they have enough money or, in the era of Uber and Airbnb and Instacart, they don’t have the patience for in-person appointments and piles of paperwork. The good news for Katchen is that two thirds of millennials who aren’t investing plan to start in the next five years. He created Wealthsimple for those uninvested masses: the company is allergic to financial jargon, and you can open an account with as little as a dollar in less time than it takes to walk to your nearest bank branch.

So far, it’s working. Katchen’s machine is by far Canada’s biggest robo-advisor (a term for a digital investing service that automates most of a financial advisor’s job). With 65,000 clients—40 percent of them first-time investors, 80 per cent of them under 45—Wealthsimple serves four of five Canadians who use robo-advisors. And with more than $2 billion in assets under administration, most of which is in Canada, the company manages more than two-thirds of the total amount invested here through robo-advisors. In the past 16 months, Wealthsimple has launched in the U.S. and the U.K., where Katchen has equally ambitious plans. He has his sights set on an IPO in the next several years and on one day breaking $1 trillion in assets.

Wealthsimple’s early success hasn’t just lined Katchen’s pockets; it’s made him the boy wonder of Toronto’s blossoming tech sector. The city is creating more new jobs in technology than San Francisco and New York combined, according to a 2017 report from real estate services firm CBRE, and it will need to lure the world’s whiz kids away from the U.S. if it intends to become a Silicon Valley–calibre tech superpower. Politicians and employers tout people like Katchen, who left a cushy job in the Valley to come back north, when they want to advertise Toronto as an affordable, Trump-free alternative to the Bay Area. When Wealthsimple reached $1 billion in assets under administration last year, Prime Minister Justin Trudeau dropped by the office for a celebratory photo op. “Wealthsimple is an example of fintech innovation at its finest,” he said, before cozying up with Katchen for the obligatory selfie.

Not that everyone likes Mike. The Big Five banks are irritated that a wunderkind with some venture capital money and a sleek website has reached the elusive millennial market. Although Wealthsimple’s $2 billion in assets isn’t enough to threaten the old guard (BMO’s wealth management arm alone, for instance, is responsible for almost $800 billion), Katchen is now too big to ignore. Within a generation, robo-advisors could supplant the majority of financial planners and transform the way Canadians invest—the banks can’t afford to miss out. So far, they’re playing catch-up, mimicking Wealthsimple’s magic formula; since 2016, both BMO and RBC have debuted competing robo-advisors.

Nor is Katchen unassailable. His millennial clients may one day need more than Wealthsimple can offer, and a market crash could quash his company without warning. But right now, it’s a race to win over un-invested Canadians, and he’s in the lead.

Katchen doesn’t quite fit the start-up founder archetype. He’s too personable to be an awkward, hoodied Zuckerbergian brainiac; too modest to be an exacting Jobs-like visionary. He wears inconspicuous sweaters, has closely cropped light-brown hair and a permanent five o'clock shadow. Unless you know where to look at the Wealthsimple office, you might miss him. He sits at a nondescript station—littered with magazines, investing books and a photo of Wealthsimple’s U.K. team—in the middle of a long communal desk, sandwiched by other employees. When I asked his neighbour if it was stressful sitting next to her boss, she joked, “I think he’s more stressed out sitting next to me.”

Katchen was destined for a career in finance—even if his first investment tanked. When he was a preteen, his older sister, Jodi Kovitz, then a student at Western University’s Ivey Business School, organized a mock-investing competition as a fundraiser for multiple sclerosis research (their mother, a psychologist and entrepreneur coach, has MS). Katchen signed up under his father’s name. The elder Katchen, a tax lawyer and former stockbroker, sat down with Michael, opened the business section of the newspaper and told his son, “Pick out a few stocks that look interesting, and we’ll research them.”

“We were a rinky-dink start-up. People were like, ‘who the hell are these kids?’”

Michael was smitten with MGI, a Toronto-based photo editing software company, and invested nearly all his fake $100,000 in the company. Its share price more than tripled during the course of the competition, and Katchen won the grand prize, a ski trip to B.C. Shortly thereafter, some family friends bought Katchen real shares of MGI as a bar mitzvah present, but they behaved radically different from his fictional portfolio. Within two years, the stock dropped from $25 a share to about a dollar, and Katchen lost his bar mitzvah booty. The flop nevertheless ignited a fascination. In high school, Katchen began reading books by influential American investors like John Bogle and David Swensen. To be fair, he was less of a square than his teenage reading list suggests. He spent his summers canoeing in Algonquin Park, he composed music for the piano and he played just about every sport at TanenbaumCHAT, his Jewish high school in north Toronto. One year, he received something called the Mensch Award. “Literally, it was an award for being the best person in the school,” says his sister Kovitz. “People just like and trust Mike.”

Katchen attended Ivey, like both his sisters before him (Kovitz is the founder of the women-in-tech organization #MoveTheDial, and Amy Baryshnik, the middle sibling, is a partner at an investment fund). After graduating, he landed a consulting gig at McKinsey, where he met the founders of the first start-up he worked at, a photodigitization and family-tree platform called 1000memories. It earned a spot in Silicon Valley’s venerated Y Combinator accelerator program in 2010, and after it emerged from the program, Katchen moved south to help build the business. He didn’t know it at the time, but when Ancestry.com bought 1000memories in 2012, it sparked the idea for Wealthsimple.

The deal left Katchen and the team wealthier than most 25-year-olds. His colleagues asked him how they should invest the windfall, so Katchen built them a simple Excel spreadsheet outlining how to create, rebalance and optimize a portfolio. They used it for a month or two before confessing, “Mike, we love the approach, but we’re lazy. Can’t you just do it for us?” It was Katchen’s eureka moment. “Even people that know they should invest don’t want to do it,” he says. “It’s too much of a chore.” If ordering lunch, paying for a cab and everyday banking had been automated, why not investing?

Katchen wasn’t the first to ask that question. Business writer Richard J. Koreto is credited with coining the term robo-advisor, then a largely hypothetical concept, in a 2002 article for Financial Planning magazine. To understand Koreto’s idea, however, you need to begin 12 years earlier. In 1990, the Toronto Stock Exchange unveiled the world’s first successful index-linked exchange-traded fund (ETF), the Toronto 35 Index Participation Fund. Like a mutual fund, an ETF is a basket of securities—i.e., government bonds, U.S. stocks, real estate—but it has significantly lower fees, and trades on an exchange like a stock. It’s generally a passive investment: an ETF will often track a given market instead of employing an army of analysts and stock pickers trying to beat it. The number of ETFs grew during the 1990s and early 2000s, but it wasn’t until the 2008 financial crisis that they truly took off. The collapse prompted distressed investors to look at ditching their high-fee mutual funds in favour of inexpensive ETFs.

They’ve continued to thrive: by early 2018, there was more than $150 billion invested in Canada in roughly 550 ETFs. The first robo-advisors, including the U.S.’s two leading start-ups, Betterment and Wealthfront, got going in 2008. They offered investors a set-it-and-forget-it service: the company would put clients’ money in a basket of ETFs—for example, 30 per cent in a bond ETF, 10 per cent in a dividend stock ETF, five per cent in an emerging market stock ETF, and so on—and algorithms would periodically rebalance their accounts, no human intervention required. “Smart investing is boring,” says Katchen. “It’s about sticking to a plan and never deviating. If you do that, you’ll beat 99.9 percent of the professional money managers out there peddling the fact that they can outperform the market.” Betterment and Wealthfront each manage roughly US$10 billion now. Their success inspired the American investment giant Vanguard to create its own robo-advisor in 2013, giving the trendy, emerging technology some much-needed credibility.

The strategy is to convince millennials it’s okay to be clueless about money

That same year, Katchen moved home from the Bay Area and soon founded Wealthsimple. At the time, there were only a handful of nascent robo-advisors, including National Bank’s InvestCube, operating in Canada, and none had emerged as a frontrunner. So he recruited Peter Graham, Rudy Adler and Brett Huneycutt—three of his former 1000memories colleagues who’d bugged him for investing advice—to help build one. Katchen also needed someone with formal credentials to give his business financial rigour. “I started cold-calling every chartered investment manager and financial analyst I could find on LinkedIn,” he says. “I got rejection after rejection after rejection. They said, ‘Why would I leave my job for a company that doesn’t even exist yet?’ ” Katchen finally met Dave Nugent, an RBC advisor and fellow Western alumnus. “Before meeting Mike, I had to search what a robo-advisor was,” says Nugent. But after hearing Katchen’s pitch, he was sold. Wealthsimple, he thought, would reach a market he couldn’t at RBC. “I couldn’t even manage money for my network of peers and friends. To invest, the minimum was $500,000 or $1 million. Not many people in their 20s and 30s have that kind of money.”

Katchen’s LinkedIn blitz also led him to Wealthsimple’s first batch of investors, directors and advisors, including Som Seif, the founder of the prominent ETF management company Claymore Investments, Joe Canavan, head of the asset management firm Logiq, as well as admired tech entrepreneurs such as Rypple’s Dan Debow and Ceridian’s David Ossip. (Wealthsimple later added Bertrand Badré, former CFO of the World Bank, to its board of directors, and Eric Kirzner, a designer of the first ETF, to its threeperson investment advisory committee, the group that creates its ETF portfolios.) After months of rejections, Katchen’s fortunes suddenly reversed, and he raised $2 million in two weeks.

None of Wealthsimple’s cheerleaders carried as much clout as Paul Desmarais III, senior vice-president of Power Financial and grandson of the late Paul Desmarais, at one time the fourth-wealthiest person in Canada. Before Wealthsimple launched, Desmarais and Power had scoped out every Canadian robo-advisor in development, as well as a couple of global ones, and even flirted with the idea of creating their own. They ultimately settled on investing in Wealthsimple instead—$10 million at first. “What differentiated Wealthsimple was their team,” says Desmarais. Some companies had great tech know-how; others had a strong brand. Wealthsimple had it all: talented computer engineers, an experienced financial analyst, a brilliant creative director. “And then there was Michael, this mission-driven leader. He has great ambition, but he is also an extraordinarily humble person,” he says. “That cocktail of people was extremely powerful.”

Wealthsimple attracted early customers through word-of-mouth marketing, info sessions for friends and lunch-and-learns at any company that would let Katchen and co. in. In 2015, the company acquired the brokerage Canadian ShareOwner, which allowed it to onboard clients and trade ETFs entirely in-house. Wealthsimple now employs more than 160 people, including nine portfolio managers, three investment researchers and more than 20 employees to field questions and concerns from customers—a lean financial team, the company says, because they’ve automated so much of the work. As the company has grown, Power Financial and its affiliates have supplied Wealthsimple with steady cash injections that, to date, total $165 million. Through various subsidiaries, Power now owns roughly three-quarters of Wealthsimple, but Desmarais, chairman of the Wealthsimple board, says Power intends to let Katchen have tremendous independence in running the business. “The people that know best how to build this business are the people who have already built it,” he says. “The reality is that they’re going after a segment that is not necessarily the segment that Power knows best, and so giving them the traction to execute their mission is extremely important.”

To Katchen, the existing robo-advisors had all been making the same mistake. Instead of marketing themselves as innovative platforms for a fresh generation of investors, they seemed content to be a new toy for the same old high-worth crowd—a client originally needed $5,000 to open a Wealthfront account. More importantly, roboadvisors were painfully dull. They talked like banks, they looked like banks and they advertised like banks: stuffy fonts, conservative colour schemes, newly retired white couples standing on sailboats staring out into the horizon. “None of it felt relevant to young people,” Katchen says. “I looked at banks and fintech brands around the world, and none of them really stood for anything.”

What would Wealthsimple stand for? Hang around its office long enough and sooner or later you’ll hear some version of its grandiose mission statement: to build the most human financial services company in the world. It’s an ironic goal for a robo-advisor—an overcompensation, perhaps, for the fact that most Wealthsimple clients will rarely interact with another human being. What it really means is that the company intends to talk to people about money in a way no one has before. Signing up for an account, for instance, is a refreshingly painless experience: the mobile app asks you a number of questions about your income, why you’re saving and what level of risk you’re comfortable with, all in a string of plain-language prompts that look and feel like a text-message conversation with a friend. On Wealthsimple’s minimalist website, a glossary of investing terms—modern portfolio theory, asset allocation, compound interest—reads more like Investing for Dummies than an M.B.A. textbook. And the company offers socially responsible and Sharia-compliant portfolios, as if to indicate that, yes, it’s conceivable that an investor might have principles that trump the goal of making the most money possible.

people being shown cellphones with wealthsimple website on themIts ad campaign preys on everyone’s insecurities about money, especially millennials’. (Photographs courtesy of Wealthsimple) 

The company’s shrewd marketing strategy is to convince millennials it’s okay to be clueless about investing, that they can stop ashamedly pretending to know the ins and outs of markets, futures or cryptocurrencies. Wealthsimple’s most effective ads prey on those insecurities. A minute-long spot that ran during the 2017 Super Bowl follows an apprehensive young man inundated by conflicting investing advice from friends, servers, co-workers and business TV hosts; it looked more like the trailer for a quirky indie flick than a financial services ad. On YouTube, one comment reads, “Where can I watch the full movie?”

For another series of ads, Wealthsimple hired the iconoclastic documentarian Errol Morris to interrogate dozens of people about their unspoken money anxieties. The company also poached GQ editorial director Devin Friedman to run its online magazine, which features frank, first-person stories: Anthony Bourdain didn’t have a savings account until he turned 44; Aubrey Plaza lived off peanut butter before breaking into Hollywood; Jen Agg opened a bar instead of buying a house. The aim is to assure clients that, just like them, celebrities and strangers everywhere have no clue what to do with their money. Then comes the sales pitch: Why not trust Wealthsimple to take care of it for them?

It doesn’t hurt that Katchen, the company’s poster boy, inspires trust himself. He is respected by his peers (he is the third-most admired start-up founder in Toronto, according to a survey of entrepreneurs conducted by Toronto Life) as well as by his employees (he has a 96 per cent approval rating on the anonymous employer-review website Glassdoor). He has a certain quiet confidence. He believes in his company’s mission but doesn’t grandstand about it. Once, when I asked him at the end of an interview if there was anything else he wanted to add, Wealthsimple’s communications director, Rachael Factor, prompted him to share the company’s mission, something he’d managed not to mention outright for more than an hour. He took a stab at it—“to make financial services simple and accessible for everyone” and “help you live the life you always wanted”—and, when he had finished, turned to Factor and asked, cheekily, “How was that?”

Katchen is so affable that it’s hard to imagine him striking fear into the hearts of bank execs. When he was building Wealthsimple, most of the Bay Streeters he met dismissed the company. They thought it was a neat—but harmless—idea and told him, he says, “We’ll crush you or we’ll buy you.” Given Wealthsimple’s success, had any banks made an offer? “We haven’t seriously entertained any approaches like that.”

So that leaves crush. As they begin to emulate Wealthsimple’s technology and millennial-friendly messaging, the Big Five will become its fiercest opponents. (Canada’s dozen or so other robo-advisors, including Vancouver’s WealthBar and Toronto’s Nest Wealth, have yet to threaten Wealthsimple’s near-monopoly, and leading American companies Wealthfront and Betterment currently have no plans for Canadian expansion.) BMO launched its robo-advisor SmartFolio, in 2016, and RBC is currently piloting a platform called InvestEase, neither of which would disclose client or asset numbers. They require an initial investment of at least $1,000, which could be a deal-breaker for millennial clients, but that may decrease over time; BMO already lowered its minimum from $5,000. Both also offer a free trial period and then charge annual management fees between .4 and .7 percent of an account’s balance. By comparison, under Wealthsimple, the first $5,000 is free for a year, after which accounts are billed either .4 or .5 percent depending on their size. ETFs themselves also charge owners a management fee, which is typically a small fraction of one percent.

The risk is that as clients get older and richer, they’ll want a flesh-and-bone advisor

When I asked Silvio Stroescu, head of digital investing at BMO Wealth Management, what might give SmartFolio an edge over a company like Wealthsimple, he began, “We are BMO.” The bank’s stability and 200-plus-year history will comfort prospective robo-advisor clients, he says, and existing BMO investors will stick with the bank they know instead of transferring their accounts to an unfamiliar start-up. Vanguard’s robo-advisor, for example, reached US$100 billion in assets—10 times the amount managed by its decade-old competitors Betterment or Wealthfront—in just three years; 90 per cent of its users were existing Vanguard clients. CIBC, TD and Scotiabank are also reportedly mulling launching their own robo-advisors.

Pauline Shum Nolan, a professor of finance at York University’s Schulich School of Business who studies ETFs and robo-advisors, says it will be easy for the banks to replicate Wealthsimple’s ease of use and its passive-investing strategy, but not its image and branding. “Wealthsimple has a cool factor, but there’s really no innovation,” says Shum Nolan, also the co-founder of PW Portfolio Analytics, which provides portfolio risk assessments. “I wouldn’t oversell the impact of robo-advice. It’s not a revolution in financial services. It’s just the adoption of technology.” A legion of bank-backed competitors would not necessarily spell Katchen’s demise—Uber continues to thrive even though established cab companies have introduced near-identical apps. But you need look no further than his past company, 1000memories, for an example of a fresh, promising business being swallowed by an industry behemoth.

If Wealthsimple can’t beat the banks, it may have to join them. In November 2017, the Globe and Mail reported that the company was exploring a partnership with CIBC, which would encourage the bank’s customers to use the robo-advisor. (Wealthsimple declined to comment.) A partnership would primarily help Wealthsimple cut down on the price of acquiring new customers. CIBC could email millions of existing clients about a new service at no cost, whereas Wealthsimple has already spent millions for Super Bowl commercials and public transit ads to sign up 65,000 users.

For the foreseeable future, Wealthsimple will also need to compete with old-fashioned, low-tech human advisors. Even tech-savvy millennials aren’t completely convinced: in a survey conducted by American loan firm LendEDU, 69 percent of millennials said a human advisor would get them a better return on investment, and a majority believed robo-advisors were more likely than a human to squander their money. Wealthsimple clients can call the company for assistance at any time, but as they get older and richer, they may revert to the banks and flesh-and-bone financial planners they once fled.

Katchen has a two-pronged plan to hang on to would-be defectors. The first remedy is Wealthsimple Black, a service that offers elite perks—even lower fees, one-on-one financial coaching, VIP airline lounge access—to clients with accounts of more than $100,000. (Wealthsimple did not disclose the number of Black clients.) The second is Wealthsimple for Advisors, a platform—also available as a whitelabel product—for financial planners that lets them govern bigger-picture decisions while automating processes like onboarding, portfolio rebalancing and tax-loss harvesting. About 400 advisors currently use the service. “The biggest challenge is getting financial planning firms to sign on,” says Nugent, Wealthsimple’s CIO. Even if an individual advisor wants to use Wealthsimple, they often can’t do so without approval from their institutions. “And they’re an older group, so they tend to look at these things with skepticism, like, ‘Why do I need this?’ ”

michael katchen sitting in front of his computer at wealthsimple office 

The true test of Wealthsimple’s longevity will be how its clients, particularly first-time investors, react to a bear market. Nugent says he’s confident they’ve bought into Wealthsimple’s passive philosophy, but, since the company’s launch in 2014, there has been no financial crisis to test that faith. Clients may have a different opinion about passive investing if a quarter of their savings suddenly vanishes. “We’ve done a pretty good job of communicating with our clients to let them know what’s happening in the markets and in their portfolios, which has alleviated the kind of panic calls that advisors typically get,” says Nugent. “Of course, sometimes some hand-holding is required to keep them calm.”

Katchen got his first taste of disaster in early February. As the stock market suffered its worst week in two years and the Dow Jones tumbled more than 1,000 points, he was with his wife, Nikki Goldberg, a doctor, doting on their newborn daughter, Ruby. He didn’t panic. “This is something we’d thought about for a long time,” he says. “We had a robust plan in place for when a market like this would come into effect.” At the office, the gears began turning. Nugent sent an email to every Wealthsimple client with the subject line, “Keep calm & carry on,” explaining what was happening (“this is normal”) and what it meant for them (“stick to your plan”). “We’re not saying it’s easy to check your portfolio balance and see the numbers go down,” the message said. “But investing based on emotion doesn’t work—sticking to your plan does… You’ll be better off for it in the long term.”

Katchen made his name as the nimble, disruptive messiah of antsy millennials, but when it comes to money, he preaches a gospel of patience. During February’s blip, his faithful listened. The company endured the would-be crisis, the market rebounded, and Wealthsimple saw no spike in alarmed phone calls or sudden domino effect of withdrawals. While traditional investors and money managers watched stock tickers with dread, Katchen and his wife were setting up an RESP for Ruby—with Wealthsimple, of course. He was, as he always seems to be, calm. Katchen is in it for the long haul. His revolution depends on whether his clients are, too.