Allow me to make the case that Robinhood is becoming the Facebook of finance and then stick around for some thoughts on how they can avoid this fate.
Facebook is a technology company that started out by growing its user base at an extremely high rate while following a “move fast and break things” mentality. The company seems to care more about its source of revenue (ad partners) than its users but those users don’t mind because they love the product. Every so often Facebook finds itself in a crisis that angers a lot of people, those people share #deletefacebook on social media of all place, eventually the crisis dies down and people keep right on using it.1
Robinhood is also a technology company that has grown its user base at an exceptionally high rate by pioneering zero-commission trading. The company seems to care more about its source of revenue (payment for order flow from Citadel) than its users but those users don’t mind because they love the app. Every so often Robinhood finds itself in a crisis that angers a lot of people, those people angrily complain online, eventually the crisis dies down and people keep right on using it.
Inertia is a huge impediment to behavioral change but it’s not just current customers who are sticking around. This whole ordeal has only ramped up Robinhood’s user base:
For most of the past week, Robinhood has been the top app in the Apple App Store:
According to the Wall Street Journal:
Its app was downloaded more than 600,000 times on Friday alone, according to analysts at JMP Securities. By comparison, the Robinhood app was downloaded around 140,000 times during its most active day in March 2020, when coronavirus fears sent stocks down sharply.
Much to the chagrin of many people who were angry with Robinhood when they restricted trading in certain stocks last week, the company is now stronger than ever. They raised $3.4 billion and are effectively too big to fail in my opinion.
Yet despite their recent success, Robinhood’s brand is tarnished because of how they handled this.
So how does Robinhood remain a successful company without becoming the Facebook of finance?
Better communication. The real story behind Robinhood’s move to restrict trading was far less exciting than the conspiracy theories being bandied about but they still dropped the ball in terms of how they handled the communication of it. Full disclosure, I am a Robinhood customer and I’ve never seen so many emails from the company as I’ve gotten in the past week.
They should continue to communicate like this on a regular basis and be more transparent with their clients. If they would have been more open and honest the day this all went down, people might not have freaked out so much.
Education and expectations. I think it’s great Robinhood has signed up so many new, young investors to its platform. We need more people involved with the stock market.
But they need to do a better job of educating their customers. It’s easier to open up a margin account and trade using leverage or options than it is to open a checking account. If you’re going to make it easy for people to use these potential weapons of mass destruction, you need to do a better job of educating them on the risks involved.
Help people understand the potential range of outcomes when making these types of trades. Set the right expectations. Use the wonderful technology built into your app to nudge people in the right direction instead of pressuring them to turn day-trading into a video game.
When Betterment customers are going to make a trade with taxable money, a prompt shows up that calculates the potential tax impact of the trade to give investors the full picture before making a decision.
Does Robinhood need to be exactly like Betterment? No, there is surely room for both types of companies. But could they help people make better decisions given their impressive UI in the app? Most certainly.
And I’m not saying every Robinhood user is going to want or need more education. Many Robinhood users know exactly what they’re doing. Others are never going to seek out helpful advice. But what if you could save, oh I don’t know, 10-15% of customers from potentially blowing up their accounts?
Surely, that’s a worthy endeavor, no?
I like Robinhood’s product. It’s clean, simple, easy to use and cheap. And as a buy and hold investor, I don’t really have to worry about the impact of short-term trading decisions.
But many users do and Robinhood should go out of their way to ensure everyone on their app has a better understanding of the pros and cons of day-trading and speculative behavior.
On this week’s Animal Spirits we went all-in on what really happened with Robinhood, what went wrong and how they can improve the situation going forward:
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The Biggest Gamestop Overreactions
Now here’s what I’ve been reading lately:
- When they start to lose they change the rules (Dollars and Data)
- Friends don’t leave friends holding the bag (Abnormal Returns)
- Wall Street thanks you for your revolution (Reformed Broker)
- My view on short-selling (Pragmatic Capitalism)
- Bored, lonely and confused isn’t a bad place to be as an investor (Morningstar)
1Somehow I’ve still avoided ever having a Facebook account.