Zero Commission Stock Brokerage

Published an article on the trend of zero commission stock booking, with challengers such as FreeTrade and RobinHood.

Small mention for GenuineImpact as wel. :wink:

Disclaimer: am a founding member investor at FreeTrade.

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Excellent write up as always! :clap:

This is a topic I find extremely interesting. For the last six years I’ve seen firms trying to transition into higher value services. You’ll see a lot of the existing brokerages are either a retail extension to their core B2B business or trying to innovate into higher margin, reoccurring revenues e.g. robo, managed portfolios, and even best buy lists.

There has also been a drive to attract these younger new customers. We know a transfer of wealth will happen, and we also know that IFAs have a massive churn issue when that transfer happens (due to lack of engagement with the next owners of the wealth.)

There are two areas in this I find very interesting, and your point at the end of the article leads onto this.

  1. Money is personal
  2. Robo advice 2.0

To summarise a few years of pricing strategy for both robos and brokers, people will pay for value if they believe it’s what they want or need. Often with more hands on services and involved advice there is a minimum amount of investable assets you will need to bring to the table. However, you find a number of potentially clients who are willing to overpay (to the point of they can’t make positive returns) for that level of service and support.

Money is extremely emotional. The customer’s financial life will change and they will focus on different aspects as they progress through their life, however some people will skip stages or simply view their money differently than you expect.

The idea of you get what you pay for rings true for a lot of people. The zero-commission brokers are a great introduction for a lot of people who were alien to investing before, they will help turn them into potential clients for other firms (e.g. robo services are winning cash savers from the banks, but then losing them to brokers/IFAs.)

The second part is robo advice 2.0 and what I see as the future of automated advice. Right now we have an advice gap that I believe guidance can do a lot to solve (not surprising as you even listed us in the guidance category!) Moving past that the current robo solutions are too high level and too soft touch.

My belief is investing will largely transition to goal driven. This will be across all your investments. Cash savings, ISA, pension, just putting some money aside to try and pick a ten times return explosion. All of this will be given goals.

After price innovation (like zero-commission) we need to move into value services. This is where goal based planning (even if largely automated which we are moving towards) will be the focus. Executing and administrating your holdings is only one step when looking at your wealth holistically. I see even the zero-commission brokers moving into high value/margin areas to offer more tailored or focused offerings, e.g. Robinhood with their easy to use margin, Freetrade with the tax wrappers. The next innovation will be packaging goals and planning on top of these extra services.

e.g. Saving for a home, why not use some margin and open up an ISA to maximise it, here is your likelihood of success and the funding plan.

I had an interesting chat with @alexs where I said I don’t believe everyone will end up being zero-commission, they will find ways to justify extra services involved with the commission to make it a premium offering.

All in all, more innovation, price or otherwise, is ultimately driving the industry forward. That is a win for customers in the end of the day!

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An interesting follow-on perspective on the path towards profitability of RobinHood.

It’s “easy” to disrupt, but to do so in a profitable manner often eludes startups.

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That is the major benefit the existing incumbents have, they can wait.

You can wait out new disruptions and then brush it aside as unsustainable. Could even strengthen your position as a reliable firm, which went it comes to money a lot of people value.

Looking at Robinhood’s valuation compared to other brokers they are at a clear premium for the position they are in, then again that is the benefit of being off a public exchange, less liquidity higher valuations (usually.)

The one odd alarm bell for me regarding Robinhood is why to enter the UK. The US market is substantially bigger, there are more opportunities to generate revenue, and the UK/rest of the world have a very different regulatory structure making it expensive to migrate over.

This is the point that keeps coming up in my mind, if they can’t make it work and scale in the US, how will the massive upfront costs involved with launching in the UK help balance the books? Have they already hit their upper limit in the US to the point it’s cheaper to win new customers overseas? Is the UK the start for then global expansion (UK regulatory environment being much closer to other nations than the US.)

It could be similar to Revolut or Uber where they want to be the app that everyone all over the world has, then roll out additional products making yourself the go to solution for everything finance/life related.

I hope we don’t end up with another WeWork situation where as we get more visibility and transparency the walls start to come down.

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I doubt they have saturated the US market but they do have the top-of-Mind brand name there now, so they will probably try to do “an Uber” and lock down other geographical markets before local startups like FreeTrade spring up and start locking down the local markets.

There are upfront regulatory and market entry costs associated, but arguably that may be still cheaper and faster than for a local startup to build something from scratch. Also, with their fundraising power they can shrug off the costs, and with nobody yet pushing hard for revenues and a sustainable commercial models, their prime focus seems scale.

I am not sure it’s the right approach though.

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Is there an alternative approach that you think they should be considering?

I am not sure there is. They can stay in their homeland, but will hit a wall eventually.

Startups at their stage are all about scaling up, its just that going international is fraught with risk and more have failed than succeeded.

I am also not sure their investors would allow them to sit tight - most of them will be greedy and impatient buggers, and want to see ever bigger paper returns.

Just like the stock market forces listed companies into short term behaviour that is questionable, VCs force startups into medium term behaviour that is very risky.

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So I guess it comes down to the founder’s risk tolerance and ambitions. If they hadn’t accepted VC money then they wouldn’t be under that pressure but obviously the company is a lot less likely to reach such a huge valuation.

Either way, I’m glad they’re giving this a shot because I’m keen to try out their app :smile:

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