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How Online Brokers Can Help Protect Investors From Costly Mistakes

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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.

First, firms should focus on guiding and informing investors vs. just speed and convenience. Recent J.D. Power research reveals that Robinhood performed much better than traditional rivals on ease of trading, with 75% of Robinhood clients rating app trading as “very easy” vs. just 51% among E-Trade clients. Conversely, just 61% of Robinhood clients said they receive alerts that help them make trading decisions vs. 78% of E-Trade clients.

Robinhood is making it easier for clients to trade but providing less help to empower them to make informed trading decisions.

Second, firms should tailor the client experience to reflect investor needs. Investors vary greatly in their knowledge, sophistication and risk tolerance, and providers need to do a better job of understanding that and providing content that aligns with each client’s unique profile. This is another area where fintech brands, like Robinhood in particular, have an opportunity to improve. Fewer than half (49%) of Robinhood clients said the app provides personally tailored content vs. 71% for E-Trade. 

Third, “good friction” must be built strategically into the user experience. A feature like alerts could be strategically used to intentionally slow down the process of executing a trade for some clients under certain conditions considered “higher risk.”

These could be fully configurable by each client so they could be modified or turned off by more sophisticated clients, but they would provide an extra step that could deter inexperienced clients from making a costly error by providing relevant real-time information about the nature of the risk and requiring another action to proceed. 

In many ways the democratization of investing made possible by the do-it-yourself online brokerage revolution has helped people take control of their financial futures and learn important lessons about building long-term wealth. But it has also made it very easy for people with little to no knowledge of the financial markets to make dangerous bets with their nest eggs.

Over time, the firms that recognize the gravity of the role they play in their customers’ lives and build solutions to help them build sustainable growth will be those that form indelible bonds. Just offering faster, more convenient trades — without the corresponding investor education — will create a more commoditized experience, one in which customer loyalties can shift as quickly as GameStop’s stock price.


Mike Foy is senior director of wealth and lending intelligence at J.D. Power.