How Wealthsimple traders might be paying millions of dollars daily in ‘hidden fees’ without knowing it
If you are a Wealthsimple customer or newcomer to Canada, thinking that stock trading on Wealthsimple is completely commission free, you might be in for a surprise.
Wealthsimple may not be as free as it sounds and, and its customers could be paying millions of dollars daily in other disguised fees without knowing it.
Wealthsimple, the Robin Hood of Canada rides on its trumpet offer of “commission free” trading.
The closest competition Questrade charges $. 4.95 per trade while the banks charge almost $10 per transaction. So on the face of it, Wealthsimple with its zero fees would seem the cheapest deal, without a doubt. But is it?
There is a disguised fee ion the platform which Wealthsimple’s 2 million customers are missing, and this is where they get you if you don’t read the fine print.
Wealthsimple is actually commission-free. But that is if you trade only in Canadian stocks. The US stock market is the largest in the world, with an equity market capitalization of just over $24.4 trillion U.S. dollars. The biggest trading stocks such as Amazon, Google, Apple, Microsoft, Facebook, Tesla, and so many others are all in the US
Wealthsimple charges you a hefty fee of 1.5% if you trade in any US stocks. Since most of the stocks in the market are US based, that changes the equation completely
Wealthsimple Trade charges the 1.5% currency conversion fee on all trades of US-denominated assets (both buys and sells). The fee is included in the total foreign exchange rate that is applied to each order. A simple illustration will reveal how smart Wealthsimple is. Let’s look at two examples:
Wealthsimple foreign exchange fee demo
- You decide to purchase $300US of a US-denominated asset like Apple. You will be paying $4.5 in addition.
- If you change your mind and decide to sell it right back, another $4.5 will be added.
- If you decide to buy two shares of Tesla which is now trading at around $710 per share, it will cost you an additional $21.3US, bringing your total cost to $1441.3 instead of the $1420 that you would have paid elsewhere.
- If Tesla shares rise by 1.5% and you sell your shares, you will not be taking home any profit as it would have been eaten up by the Wealthsimple foreign exchange conversion fee.
- Let’s assume you make 12 trades a year (one per month) and each trade earns 5% every time, but it is always in US$
- This means that every time you make a trade that is in USD, you will be hit with a 1.5% currency conversion fee. Thanks to the magic of compounding, you should have made a 79.59% return over the year. However, due to the conversion fee you paid, you end up with only a 26.82% return.
- On a $10,000 trade, you should be smiling home with a hefty profit of $7,959. Instead, you end up with only $2,682. They say there’s nothing like a free lunch.
The Wealthsimple catch doesn’t end there. The foreign exchange rate you get when converting from Canadian to US$ is not usually favorable and may have a spread already embedded. So you lose out a few dollars there as well.
And because it is all calculated automatically, instantly and built-in, most customers do not catch the foreign exchange mark up by Wealthsimple right away.
The cost to Wealthsimple customers.
Wealthsimple now has over 2 million customers and on average is adding over 50,000 new customers including immigrants every month Assuming that all the customers trade only 200$ in one day in US stocks, that would amount to $400 million.
If you apply the 1.5% conversion fee, Wealthsimple would have made a cool $6,000,000 in one day alone in exchange fees! That’s quite a handsome paycheque for one day’s work.
In 10 days, that will translate to $60 million. How much will that pile up to in 360 days? You can do the Maths.
How is Wealthsimple regulated?
The Investment Industry Regulatory Organization of Canada (IIROC) is the pan‑Canadian non-Government self‑regulatory organization that oversees all investment dealers and trading activity on Canada’s debt and equity marketplaces, including Wealthsimple
The Canadian investment industry is self-regulating. That means the industry itself is responsible for setting standards, protecting investors, and policing its members.
IIROC maintains the capital markets and is supposed to monitor the markers carefully for any unusual activity that could signify cheating, rule infractions, or fraud.
To balance its focus on industry, IIROC provides some funding to The Canadian Foundation for the Advancement of Investor Rights, a non-profit organization that educates and promotes the rights of individual shareholders.
The Foundation has raised questions about whether IIROC goes far enough in disciplining its members who break the rules and does enough to protect retail investors
The Foundation claims that IIROC is being too gentle with its dealers and not acting in the best interest of investors. Instead of demanding dealers comply by a specific date, IIROC is merely “encouraging” them to.
Wealthsimple does not fall under the jurisdiction of the Security Exchange Commission and Ontario Securities Commission (OSC) who have more enforcing powers.
Why can’t you have a US$ account on Wealthsimple?
Other online brokerages are either denominated in US$ or give you the option to have both a US$ and Canadian $ account. Scotia iTRADE, TD Direct Investing, National Bank Direct Brokerage, RBC Direct Investing, BMO InvestorLine, and Questrade all have US$ account options.
Wealthsimple Trade, on the other hand, requires all assets to be held in Canadian dollars, which means you incur the currency conversion fee with every applicable trade.
When The Business Immigrant contacted the Ontario Securities Commission, OSC, the spokesperson said they do not have regulatory supervision over Wealthsimple.
We also asked the Investment Industry Regulatory Organization of Canada (IIROC) why Wealthsimple does not have a US$ account option for its 2 million customers and why Wealthsimple is allowed to create the impression that its platform is fully commission-free.
They had no clear response.
What should Wealthsimple customers now do?
Unless there is a clarion call by Wealthsimple customers urging Wealthsimple to provide the US$ account option, or other consumer advocacy groups urge the Government to intervene, the situation will stay the same.
Until then, Wealthsimple’s 2 million customers can only hope. Although hope is not a strategy, that is all they have at this stage.