In Focus: Robinhood The Disrupted
You cannot invest. You're not smart enough. You don't have enough money. The process is complicated, and we don't have time to explain it to you. The stock market is for people with big money, when you have big money, come back and see us. Take the $1,000 you have and put it in a CD.
That was the voice of old Wall Street, and this is how regular people with small amounts of money used to be greeted by much of Wall Street in the '80s and 90s. Merrill Lynch had no place for a young couple making $20,000 a year between the both of them. But luckily for small investors everywhere, discount brokerages established themselves as reliable places where the public could invest their money.
Although discount brokerages provided a better option to the full service houses for your average 9-to-5er, it wasn't a great option. There were still minimum deposits to come up with, which could be thousands of dollars. There was also the nagging maintenance fees that discount brokerages charged for holding an investors money. Oh, and the inactivity fees, that was a thing too. If you didn't have money to trade once a month you would be hit with an inactivity fee. Then there were the commission fees to deal with. It was a tough go for the average guy or girl looking to get into the markets.
Disruptor Yes, Threat No.
In 2014 Robinhood, an investment app, enters the investment space and it's commission free, with no minimum deposit required. Old Wall Street's reaction to Robinhood wasn't hostile as some would expect, Wall Street did a shoulder shrug and continued doing big business as usual.
Robinhood would become an investment tool that catered to a customer that traditional Wall Street didn't care much about. The charts, one with traditional full service brokers and the other with discount brokers, displays increases in market values for traditional full service brokers and discount brokers since Robinhood hit the app store. Robinhood a disruptor, yes. Robinhood a threat, not really.
Even this week's announcements of commission free trades by Schwab (SCHW), and then by TD Ameritrade (AMTD), and E-Trade (ETFC) seemed at first to be motivated by Robinhood, but after further investigation these particular firms have been cutting fees for years. Remember the inactivity fees and maintenance fees I discussed, they've been gone for some time now. E-Trade, used to charge a $9.99 commission per trade, they've trimmed that down to $6.95 per trade, or $4.95 for very active traders. Although discount brokers had been racing to cut fees before Robinhood, I have to attribute some of the zero-commission moves to Robinhood.
In May of 2018, major financial news outlets were leading with the headline that Robinhood had surpassed E-Trade in number of customer accounts, and that was a big deal for the young company. Robinhood had hit 4 million user accounts in four years. E-Trade had 3.7 million accounts, and had been in business for over 30 years. Robinhood did admit at the time that not all of their 4 million accounts were funded, in addition to that Robinhood didn't and doesn't release it's assets under management, causing another shoulder shrug by traditional Wall Street.
The Disruptor is Disrupted
Robinhood is seen as a disruptor, but it's difficult to find what it's disrupted. Yes, it provided a way for millions of people to invest. A portion of those people however, weren't being coveted by major Wall Street firms. Goldman Sachs (GS) has no place for the young or old investor who wants to build a position in Apple (AAPL) one share at a time. Doing so through TD Ameritrade or E-Trade would feel like a death by a 1000 cuts, as the commissions paid for each transaction ate into every dollar gained.
The thought of traditional Wall Street being concerned about Robinhood's entry into the investment market has always been overstated. Now though, Robinhood has to worry about Wall Street infringing on their turf with zero-commissions trading.
Robinhood's next step, not counting the potential savings and checking account aspect of their business, will likely be information. Information is what their competitors offer that they don't. A Tesla (TSLA) quote on the E-Trade's mobile platform and the Robinhood platform gives investors almost the same information. There's the detailed stock quote, a chart, a few recent headlines, earnings details, and analyst's ratings. Surprisingly Robinhood has the same Morningstar report from September 21, 2019 that E-Trade does.
The story changes though when an investor moves from the mobile app to the websites. Robinhood's site carries the basics, similar to it's app. E-trade however offers, financial information on Tesla, a break down of analysts who have buy and sell recommendations, a Trefis Price Analysis, and lots more. For zero commissions on stock trades, E-trade and the others offer a better value. Robinhood will need to match this to stay relevant.
Time To Disrupt Again
Robinhood gained popularity by knocking down the barrier that stood between regular people and the world of Wall Street investing, and all it took was a basic app and commission free trading. But what does Robinhood do next? The investors no one wanted, the investors that Robinhood invited in, and provided investment experience to are now wanted by Schwab, Ameritrade, and E-Trade.
I think this move to zero-commissions is a win for the general public, people and VCs who have invested in Robinhood may think differently. But I'm a believer that the stock market is the simplest way to change a person's financial situation over the long term, yet so many people go through life without learning how to access it. Add to that, the people with the information of how the stock market works aren't very eager to pass on what they've learned to strangers, and that leads to a large number of people sitting on the sidelines while billions of dollars are made.
Competition is great for the consumer. Pressure has been applied to Robinhood by the major discount brokers, but I don't see Robinhood going anywhere. As I've pointed out the Robinhood app is very basic, but with a few more features, and better information to help new investors along they could continue to grow in spite of what the other discount firms are doing. The ball is Robinhood's court. The disruptor, the company that took the investment industry by storm is being stormed by the investment industry, how will they respond?