Do-it-yourself online brokerage firms have been laser-focused on delivering convenience, speed and accessibility, but less so on providing the necessary education or guidance to empower investors to make smart — not just fast — trades. That could hurt them.
As online brokerages including Robinhood, E-Trade, Interactive Brokers and Webull Financial rushed to restrict trading in GameStop, AMC and Blackberry last week, amid a viral frenzy of trading, it became all too clear that speed and convenience alone are not enough to carry their brands.
By Friday, the online brokerages were being named as defendants in a series of lawsuits asserting that the firms were “depriving retail investors of the ability to invest in the open-market” while protecting the industry establishment.
There is an important angle to this story that has received less attention, which is that many individual investors participating in this rally are young and inexperienced traders who have piled into the market in record numbers since COVID.
Many of them bought shares in these companies at prices that far exceed any rational assessment of future earnings potential, responding to online chatter or just trying to take advantage of short-term market momentum. Many of these investors will wind up losing money and becoming disillusioned with investing, or worse, as we saw with the suicide of a 20-year-old Robinhood customer last July.
Free trading and consumers with more time on their hands have certainly contributed to the substantial increase in first-time investors and increased trade volume, but another key factor is the success that brands such as Robinhood have had in creating an incredibly easy-to-use, mobile-friendly trading platform. In prioritizing speed and accessibility at the expense of education, however, many of these platforms have created a dangerous recipe for widespread consumer backlash.
In order to continue to attract and retain new clients, Robinhood and other online brokerages need to help protect less-experienced investors from making costly mistakes. Some changes along these lines are already in the works in the aftermath of the client suicide attempt, but clearly more still needs to be done.
Based on our analysis of online brokerage customer experience, tracking what resonates most for customers, along with some their biggest pain points, we’ve found the following to be priority areas of focus for the industry.