How Wealth Management Firms Chase The Robinhood Generation

The big picture

• Wealth Managers had a banner year
• Millions of “New Investors” flocked to $0 fees account
• Trading volume doubled at Fidelity in 2020
• These new investors are younger, diverse and not mass affluent
• Banks, fintech and now Asset Managers have all launched accounts dedicated to “teens”
• The goal is to capture “customers for life” in their teenage years
• As for retail investors, Asset and Wealth managers now bet on being able to “upsell” them
• All this come with some challenges: market volatility as new investors chase “meme stocks”, servicing expectations i.e. Robinhood fiasco limiting trading on certain stocks prompting calls for Congress hearings, rising costs with additional infrastructure build and hiring to service more accounts, flat revenues and decreasing profitability, regulatory scrutiny
• There was a saying in Wealth that marketing efforts need to be focused on Ultra High Net Worth Individuals, High Net Worth and Mass Affluents.

Source: Slideshare — Cisco

These categories are made of corporate retirees, successful executives, etc..

• The last segment is considered self service, by definition, it has never been a priority. And especially since the race to $0 fees started.
• I remember that a trade used to cost $6.5 on the cheapest self service platform I knew in 2010. My legacy bank had a minimum deposit of $10,000 to open a brokerage account and trade was $12. This is only 10 years ago.
• Today things have changed and retail investors are now market movers.

Source WSJ

• According to the WSJ:”Millions of individual investors stampeded into the market last year, enticed by zero-commission brokerages and easy-to-use investing apps, and their interest helped fuel the post-pandemic rally”
• In the New Yorker’s article on “Robinhood’s big gamble:” Brian Barnes, the C.E.O. of M1, a competitor of Robinhood’s that focuses on long-term saving and investing, said the app’s influence has been profound. “They’re the first company that introduced premier user experience and design in a mobile application to finance, and they also dramatically lowered the cost of investing,” he said. “They’ve encouraged an entire population who wasn’t buying stocks to buy stocks. There’s a lot to thank them for.”

Be smart

• Financial companies are competing for “customers for life” who can grow into various products as their financial needs evolve.
• Robinhood pushed Schwab, Fidelity and E-trade to cut trading fees to $0
• Now, no broker dealer is considering that self service investors, are a waste of marketing money
• The race is to get these future investors as soon as possible
• Enter Fidelity: According to MSNBC, The investing firm announced the Fidelity Youth Account, a brokerage account specifically designed to help kids ages 13 to 17 invest, save and spend.
• The accounts are available to teens whose parents or guardians have Fidelity accounts and allow young people to save, as well as buy and sell U.S.-listed stocks, most exchange-traded funds and Fidelity mutual funds.
• The Fidelity Youth Account combines a new library of tailored educational content and tools, Fidelity’s award-winning brokerage platform, mobile app with a simplified user experience, and customer-centric practices such as zero subscription fees, zero account fees, zero minimum balances, zero domestic ATM fees, and zero online commissions. Parents and guardians with a Fidelity account can work with their teen to establish the Youth Account and engage together in financial learning, giving the teen hands-on experiences and helping create better financial habits as the teens age.
• Obviously, every wealth based platform is targeting “New Investors”. According to Money under 3o: Here are the Best Investment Account for Young Investors

Why it matters

• Everybody is doing it, so the trend is not a fad anynore it is now a strategy
• Banking fintech firms have specialized on teens for a while, companies, like Step, Current or Wingocardhave all offerings dedicated to the segment.
• For example: Step, a teenager-focused US mobile banking startup, has raised $100 million in a Series C funding round led by General Catalyst and joined by Stripe and a host of celebrities including Will Smith and Jared Leto.
• The funding comes as Step reports rapid growth, hitting 1.5 million users after less than six months in the market, thanks in part to its celebrity strategy, which saw D’Amelio, the hugely popular dancer and TikTok star, brought in to promote the service to her 100-million-strong fanbase.
• In Canada, Wingocard launched its mobile banking app and debit card focused on teens Wednesday following $1.7 million in additional seed funding.In early 2020, the Montreal-based company was founded and opened up its waitlist that grew to more than 75,000 teens in the U.S. Wingocard’s app is free — something competitors are not doing, he said. It focuses solely on teens 13 and up, offering free gamified financial literacy tools and an account with no overdraft fees to manage that connects to a parent’s account. There is also a digital card for online and in-store shopping, as well as a physical Visa Debit card.
• From: Techcrunch:. Current began its life as a teen debit card controlled by parents, but later expanded to offer personal checking accounts powered by the same underlying banking technology. Like a range of modern-day “neobanks,” or digital banks, the Current app offers a baseline of standard features like free overdrafts, no minimum balance requirements, faster direct deposits, instant spending notifications, banking insights, free ATMs, check deposits using your phone’s camera and more. As a result of the new round, the fintech company has roughly tripled its valuation in five months, to $2.2 billion
• Last month, Current, which has now grown to nearly 3 million users, announced it has raised a $220 million round of Series D funding, led by new investor Andreessen Horowitz (a16z).
• Note the same internet influencer strategy: Jimmy Donaldson (aka MrBeast) has signed an exclusive, long-term content creation deal with fintech company Current–and has also become one of its investors.
• In an April 24 upload, the famously generous YouTuber (who has 60 million subscribers and nets more than 500 million views per month on his main YouTube channel) announced he will personally send $1 each to the first 100,000 people who sign up for Current using his creator code.
• Incumbents and credit union are also bucking the tend: According to Nerd Wallet the following banks offer $0 banking fees to teens

• Acorns, for example, recently announced their Acorns Early service. This service, which is free to all babies born in 2020 due to COVID-19 Pandemic, allows parents, guardians, and family members to set up a custodial account for their child.
• Note that custodial accounts have existed for a while and have been “the way” of teaching investments and financial literacy to kids and teens

Yes but

• Regulators do not like gamification in financial services: Massachusetts securities regulators filed a complaint against Robinhood Financial LLC, alleging the popular online brokerage aggressively marketed to novice investors and failed to put controls in place to protect them.
• Meme stocks are reminiscent of past financial bubbles: According to WSJ: Similar to previous rallies among meme stocks throughout this year, no singular or clear catalyst has seemed to drive this week’s rally. Analysts said the jump has likely been driven by a crosscurrent of factors that have prompted individual traders to pile in. With cryptocurrencies having lost much of their steam this month, many nonprofessional traders have re-entered the stock market on the hunt for gains.
• We will need a decade to see if these strategies will pay off
• Teen Investment comes with taxes: Enter the kiddie tax: According to MSN: The kiddie tax kicks in for any investment income over $2,200, taxable to the parent at their tax rates. In this case, the parent would have to pay taxes on $2,800 at their rates.
• The rule may impact children under 19 and full-time students aged 19 to 23 if they are still dependents on their parents’ tax return. In addition to the risk of kiddie tax, extra investment income may hit families filling out the Free Application for Federal Student Aid, known as FAFSA,

Pop the bubble

• According to McKinsey: 72% of US households now have a retirement account

Wealth Managers are chasing younger customers because they need to prepare them for a world with higher fees

The $0 fee model is costly.

• Return on assets are down 11pct in the last 15 years
• According the latest Mckinsey report on Wealth management:
• As of end of the third quarter of this year (2020) , the industry was managing a record-high $34.7 trillion in client assets, with annualized year-to-date net flows at a healthy 2.6 percent (equal to the first nine months of 2019).
• However, the underlying economics of the industry tell a different story. Revenue pools, which have remained almost flat this year at an annualized $220 billion, have been significantly aided by equity markets — average client assets have been up by 10 percent — while return on assets has dropped by 11 percent (8 bps), the largest year-over-year decline in the last 15 years.
• The dramatic decrease in revenue yields has primarily resulted from narrowing spreads on deposits and the proliferation of zero commission trading for equities and ETFs. At the same time, costs continued to rise as they do perennially — with an increase of 4 percent year over year. As a result, industry profit pools and pre-tax margins declined by 15 percent (roughly $8 billion) and 4 percentage points, respectively.

• Source McKinsey

The catch

• Something is up: The industry added millions of new customers
• According to WSJ Fidelity had 26 million retail accounts in 2020, up 17% from a year earlier. Workplace retirement accounts, including those in 401(k) plans, rose 7.9% to 32.6 million. Daily trading volume doubled.
• Brokers dropped commissions to zero and let customers trade in fractions of popular stocks, fueling a record year for individual-trading volume. The industry added millions of new customers. Low- or no-cost brokerage accounts and investment funds have helped lure a generation of new investors to the wealth-management industry. While those products won’t help short-term profit margins, firms like Fidelity are hoping their new customers will eventually turn to them for more lucrative services, including financial advice.
• At Fidelity: A large chunk of the new money coming in pays little or no commissions or fees. Fidelity’s strategy has been to attract as many new investors to its platform as possible with low- or no-cost services. Once they are in, the firm is betting many will graduate to more lucrative offerings such as financial advice.
• It’s going to be harder and harder to convert self serviced new investors into fee based advisory clients. According to McKinsey:Adding younger clients, while critical to future advisor growth, will be an increasingly challenging endeavor. While new-client-acquisition rates for full-service advisors was stagnant, technology-led wealth platforms experienced significant new- account growth in 2020. Many investors start out as “self directed” and switch to human advisors as their needs become more complex, but with online offerings becoming more sophisticated and adding additional service options, enticing clients to switch may become a taller order.

What’s next

• Wait and see
• The goal is to have those day traders, meme stock traders, retail investors, Gen z, Millennials invest in products with higher fees
• Offering access to Private markets can be an avenue
• Offering access to IPOs
• Offering access to crypto exchanges

By the numbers

These New investors are indeed younger and not Mass affluent

According to the Finra Foundation: New Investors during 2020 tended to be younger, earned lower incomes, and were more racially/ethnically diverse than Experienced Entrants and Holdover Account Owners. Consistent with the narrative that new investors tend to be younger than their experienced investor counterparts, almost two-thirds (66 percent) of New Investors were under 45. Investors aged 30–44 comprised the plurality of New Investors and Experienced Entrants (40 percent and 28 percent, respectively), while the plurality of Holdover Account Owners were aged 60 and over (45 percent). In fact, there were almost three times the number of investors aged 60+ among Holdover Account Owners (45 percent) compared with New Investors (16 percent).

Source: Finra foundation

Source McKinsey

• Source McKinsey

What people say

• “You just have the herd mentality bidding stuff up based on rumor or Reddit or TikTok,” Mr. Aronson said. “This is just payback for a long time when we had it relatively easy, when value investing worked really well and any monkey could do it.” WSJ
• “The advent of platforms like Robinhood are showing that young people are more interested in investing than they were in the past,” said Jonah Berger, an associate marketing professor at the University of Pennsylvania’s Wharton School. “Younger people are obviously a new customer segment that are interested in investment and saving,” he said. MSN

What I think

• The rise of the retail investor is real
• The battle to capture a share of this once overseen market is ongoing
• There is room for more competition
• Expect more celebrity endorsement and more influencers strategy
• There will be another market correction, at some point, there always is
• Financial literacy and education is key in helping these “New Investors” understand what lies ahead
• The stock market remains one of the best way to create wealth, it’s good to see more people participate