Wealth managers have a hidden lead on Robinhood

The line between investing and trading has certainly blurred this year. As the long-term rise of the retail investor converged on fee-free trading, Fidelity and Charles Schwab had an exceptional year. But no one has caught the eye quite like Robinhood. With a user-friendly app and zero trading fees for stocks, options and cryptocurrencies, the company insists it aims to “democratize investing”. Investing shouldn’t just be easy or cheap, they say; it’s time to have fun.

Judging by the frenetic retail activity on the platform during lockdown – including the GameStop

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and Dogecoin manias – the public is listening. This has worried some wealth managers. Low cost platforms are already challenging the status quo; is gamified trading the new competitor in the industry?

Not enough. New evidence suggests that wealth managers who preach patience need not worry that their target audience will move to Robinhood anytime soon. However, I’m also here to say: don’t be too complacent. For fund managers, the 2021 trading boom reveals three crucial lessons.

Why Robinhood is not the future of wealth management

Trading was a recreational activity long before Robinhood came into the picture. But in 2021, between lockdown and social distancing, trading for fun has definitely become an easier sell. With lockdowns ending, evidence shows day trading windfall is rapid cooling. Those who have confused gambling with investing are turning to other interests.

But these were never real prospects for wealth managers. What about the avid investor who truly believes frequent trading leads to long-term financial gains?

For this customer segment, Robinhood will struggle to deliver on its promise. Decades of research repeatedly affirm the same result: frequent trading makes investors poorer. On Robinhood, business activity is already much higher compared to other platforms. During the first quarter of 2020, its users traded nine times as many stocks as E-Trade clients and 40 times as many stocks as Schwab clients.

And now, new research shows that’s only half the problem. The Robinhood app displays far fewer stock symbols compared to other brokerage platforms. Instead, the app highlights stock listings, like “Top Movers,” which feature the stocks with the biggest daily price moves.

Mixing simplified information with user inexperience is a dangerous cocktail, the study showed. This leads to attention-driven buying and buy-side rally events – usually followed by negative returns.

When it comes to real money, young investors like it to be boring

Trading has nothing to do with investing, but do retail investors know that? According to Vanguard, the answer is a resounding yes. The asset management giant followed more than five million of its retail clients, from 2015 to the first quarter of 2020. Its recent How America Invests report reveals that, of customers who trade, only one-third qualify as ‘frequent traders’.

Your trading enthusiasts aren’t the youngsters either. The typical “individual security enthusiast” is in their 50s, almost 20 years older than the typical “ETF enthusiast”.

Not only are younger investors more likely to invest in ETFs, they also tend to be more bearish on average (compared to their older peers) and hold a large portion of their capital in money market funds. It is especially the informed the young cohorts who allocate a larger part of their assets to high-yielding assets!

Wealth managers: don’t let a good crisis go to waste

That the advisors’ DNA runs counter to Robinhood’s values ​​isn’t a problem – it’s a business advantage. The day trade rush of 2021 may have subsided, but the real lesson is how well emotional messaging works. Here are three ways wealth managers can get smart with their marketing by showing how great they are. contrary to Robin Hood:

1. Get someone talking.

Robinhood tells its customers that it is opening up hallowed financial corridors – previously reserved for big players – and letting everyone in. For wealth managers, the opposite of being for everyone is being for someone. For years, I’ve been saying: pay attention to Millennials, it’s an important segment. Now, as the cohort delves deeper into their investments, becoming relevant to a particular niche is just as important.

As I said in my previous Forbes column, it may not be a question of age at all. Instead, focus on behavior and life events. Some Millennials don’t want to rely on technology to get updates on their investments and would rather hear from you directly. Likewise, you may have Baby Boomer customers who don’t want a call or email unless it’s an urgent situation and prefer to access a website or app for Routine news and account updates.

2. Make it the emotion.

Last year, as the pandemic unfolded, I wrote for the FT:

“Wealth managers should remember that emotional appeal is critically important to effective marketing, especially when the products and services themselves look very similar.”

In a year of loss, stress, anxiety, it has only come true: the emotional opposite of gambling is safety. Financial decisions are inevitably risky; but, while trading will provide you with thrills and excitement, for major financial decisions clients want the exact emotional opposite. Clients want to be sure they can achieve their financial goals without having their lives at the mercy of Elon Musk’s tweets. Marketers need to seize the opportunity and appeal to the emotions of comfort, security, and peace of mind.

3. Be sure of the goal.

When I recently hosted the Nucoro webinar, The Rise of the Digital Retail Investor, panelists explained that savers, investors, and traders are all different types of customers. But we agreed that all money management ultimately comes down to securing the client’s financial future.

Robinhood chooses to focus users’ attention on risky products and the very short term future. But their emotional trigger tells customers they can access privileges previously reserved for the few.

For wealth managers, this is the takeaway. Ask your marketing to tap into the same powerful emotional desire, but longer term. It can be a wonderful vacation in the year or a magnificent property in five years. Beyond the pandemic, beyond the lockdowns, customers in 2021 want to hear: it’s within your reach.

Dolores W. Simon