Is the endgame for stock commissions really free trades? Silicon Valley startup Robinhood.io wants to try, this time in smartphone app form. Recently approved by finance regulatory agency FINRA to become a broker-dealer, this comparison chart shows their ambitious plan to offer unlimited free trades with no minimum balance requirement.
This has been tried before. Zecco stood for Zero Cost Commissions. They had no physical branches, free trades had to be placed online. They had a “lean engineering team”. They used social media. They tried to make enough money from margin interest and order flow to cover everything else. But it wasn’t enough, and they gradually had to raise commissions.
I have my theories why. If your main selling point is “free commissions”, you’re going to get a lot of inexperienced “newbie” investors. Being a broker-dealer has a lot of compliance and regulatory overhead, so together you’ll need a lot of call center workers to provide good customer service. Skilled employees cost a lot of money. (Sometimes I think it was actually efficient for Scottrade to spread these people out in physical branches.) Plus, newbies with low balances won’t generate much order flow and are unlikely to pay much margin interest.
Many free online services and apps can get away with minimal staff because they can effectively just ignore the high-maintenance customers and hope they go away. Robinhood won’t be able to do that.
I want Robinhood to succeed. I signed up on their early access waitlist (use my link and supposedly I’ll move up in line) and I’ll likely open an account to try them out. But I just don’t see where the alternative revenue will come from.
Added 12/26: Their fee schedule includes a $50 account closure fee. This is not a common fee and hopefully some public pressure will get them to remove it?
Added 1/8/14: The $50 account closure fee is no longer shown on the fee schedule.