But Pipitone describes fiduciary risk as just “another layer of scrutiny and liability” that fintechs can adjust to over time.
Robinhood’s ability to continue its remarkable growth into the future may depend on its ability to manage these risks. Muhota says that may mean the platform has to add more guidance, or an advice component, for its users.
“There may eventually be a degree of training wheels that you’ll have to put on something as powerful as a Robinhood,” he says. “Especially for a segment that doesn’t have deep experience in investing.”
At some point, he argues, Robinhood’s streamlined user experience will not be unique anymore—as companies like Fidelity, Schwab and E*TRADE adopt commission-free trading, fractional shares and mobile investing applications of their own and Robinhood faces increased competition from applications with similar functions like TradeZero and Revolut.
What Young People Want
Instead, Robinhood will have to work to cultivate its dedicated following of young investors in order to remain relevant as it approaches a potential public offering or exit transaction. Young investors’ attraction to the platform may show their fatigue with passive index investing after a wild ride through Covid-19’s volatility. Or it may show that smaller investors in general have a tremendous appetite for active stock picking that was not being met.
“Young people are thinking differently about the future,” Weiss says. “It’s not just are you investing in mutual funds and ETFs. There’s a segment asking about cryptocurrencies, individual securities and accounts they can control. I have a good number of clients who have a small portion of their money in Robinhood accounts because they actually enjoy investing.”
Weiss believes that advisors need to be open to clients who wish to hold a portion of their money away on platforms like Robinhood for some self-directed investing. And if young people are feeling more affinity with active, self-directed investing, advisors will have to adapt.
“Advisors need to be creative,” says Pipitone. “Their value add needs to be packaged in new and different ways if they want these millions of newer entrants into the market to one day understand the value of having a managed account.”
Despite its shortcomings, Robinhood may signal to the financial services industry that there’s an emerging trend in consumer preferences, Muhota says. “The real learning opportunity is zeroing in on what it is about Robinhood that attracts the Gen X, Y and Z investor, and determining how you can apply them to your own platforms,” Muhota says. “I think consumers are disaggregating the way they think about their relationship with financial providers—they want specialized user experiences in their financial lives and to access pure-play specialists who own their space. A 50-, 55-year old investor might want all their transactions with just one player, but the younger generation is more interested in a powerful user experience.”