With only a few weeks left of summer, it seems that online brokerages are already gearing up to hit ground running for fall. If there’s one theme emerging, it’s that online brokers on both sides of the border are going compete even harder than they ever have before.
In this week’s Roundup, we dig deep into the first earnings report from Robinhood and analyze the interesting things that were said (and not said) on the earnings call. From there, it’s yet another new feature fiesta, as BMO InvestorLine drops some new enhancements ahead of the fall rush. As always, we highlight some intriguing investor chatter, including some pretty big rumours of new pricing, as well as tackling tough subjects.
Robinhood’s First Earnings Report Sets a High Bar
Summer is a great time for catching up on leisurely reads. That said, the latest thriller isn’t something most folks would put high on their reading list, and yet it is filled with (almost) more legal drama than a Free Britney post.
This past week, Robinhood issued their first quarterly earnings release as a publicly traded company (ticker: HOOD), and while their brand is typically associated with keeping things simple, it turns out that their financial reporting is anything but.
At a whopping 274 pages long, the full filing of their quarterly result is great reading for those with the time and stamina to parse through legalese and financial metrics. Of course, coming on the heels of their IPO, this first earnings report is also filled with a lot of reference to the go-public moment, so it is likely that their next report will be shorter.
With so much ground to cover, it is impossible to dive into all of the interesting details inside of the Robinhood earnings report in this Roundup. But what is abundantly clear from the report and the investor earnings call is that Robinhood intends to live its best life as a public company. Somewhat differently, however, it is unclear if that experiment will truly pay off. Before going down that rabbit hole, a quick look at the performance numbers is in order.
Robinhood Cashes in on Crypto
By many measures, the year over year performance at Robinhood is stunning.
Total revenues increased 131% to USD $565 million, the number of net cumulative funded accounts (NCFA) increased 130% from 9.5 million to 22.5 million, and assets under custody (AUC) shot up 205% to USD $102 billion from USD $33 billion. Those numbers pale in comparison, however, to the transaction-based revenue increase from cryptocurrencies, which increased 46-fold from USD $5 million in the second quarter of 2020 to USD $233 million in Q2 of 2021.
In other words, on a top line basis, thanks to crypto trading, dogecoin, and meme stocks they crushed it.
Of course, nobody, including the founders of Robinhood, expects these kinds of numbers to be repeated anytime soon. The convergence of meme stock– fuelled trading frenzies and Elon Musk– fuelled crypto bumps are part of a new reality for investors and markets to contend with, but the timing and nature of these market influences is tough to build a business around.
As can be seen from the chart above, what was incredibly fascinating about first set of public financial results from Robinhood was the degree to which their fortunes were made by fast-money or YOLO trading customers. Options, a highly leveraged approach to stock trading, as well as cryptocurrencies, made up 88% of Robinhood’s transaction-based revenues. Revenues from equity trading, which actually decreased 26% year-over-year, came in at $52 million.
In addition, in the earnings call, Jason Warnick, Chief Financial Officer at Robinhood, revealed that over 60% of Robinhood customers traded cryptocurrency during the quarter.
These figures paint a portrait of Robinhood and a huge portion of their client base as interested in trading in highly speculative financial instruments rather than image of the “democratized” access to trading stocks that the online brokerage was founded upon.
Surge in New Accounts Likely a Sign of Peak HOOD
Another metric in the earnings release that was off the charts was new account growth in the quarter. According to Warnick, almost 4.5 million net funded accounts came into Robinhood during the quarter, a staggering number by any measure. Charles Schwab, the largest online brokerage on the planet (for now) added 1.45 million new accounts and Interactive Brokers barely registers by comparison at 91.5 thousand over the same period.
There is definitely credit where were credit is due for Robinhood being able to massively scale its client base over such a short period of time.
In fact, it is likely that the Robinhood surge in client activity is the envy of online brokerages everywhere, especially because acquiring these new clients was absurdly cheap thanks to a combination of industry-leading digital UX, huge investor demand, and clever marketing with their stock referral bonus.
As mentioned above, however, the forces that converged to pull investors in is likely not going to reoccur anytime soon, nor can the executives at Robinhood plan their business growth strategy around WallStreetBets and Elon Musk’s views on Dogecoin.
Traditional metrics for valuing online brokerages typically look at trading activity as well as the level of assets that clients of online brokerages have, which is why analysts view Robinhood with some skepticism when it comes to the value and loyalty of their client base.
In fact, one of the analysts on the earnings call, Steven Chubak of Wolfe Research, pointed out the “graduation risk” problem of Robinhood clients. Clients that are leaving Robinhood take with them an account size that is 4x the average than the typical Robinhood account. What was particularly interesting in the exchange was that Warnick stated:
“In terms of the part of your question about graduation risk, what I would tell you is that we fully intend to grow with our customers. You see that in our product road map, as we talked about wanting new investors become long-term investors, that’s really going to inspire the products that we’ve allowed and the account features that we roll out so that we don’t see that. And then what I would tell you is when we look at churn, we’re not seeing any kind of customer demographic concentrations as a big concern.”
The big unknown seems to be whether the rush of options and crypto traders will be interested in “long term” investing and will choose to do so with Robinhood, especially considering the lack of account types and features offered by their peers in this space. Robinhood will have to work both hard and smart to be able to earn business from Millennial and Gen Z investors who want to invest (not just speculatively trade).
Although this wasn’t highlighted in the investor presentation or press release, the sheer number and magnitude of lawsuits overhanging Robinhood present significant headwinds to investors and potentially to consumers. In Robinhood’s quarterly filing, there are so many lawsuits it is hard to imagine these activities not just being costly to Robinhood to contend with but also a major distraction to management to have to attend to.
Many of those lawsuits have risen from stories that have made major headlines, including trading restrictions on meme stocks, trading outages (in 2020), gamification, account takeovers, and more. The recent settlement with FINRA (approximately USD $70 million), which also happened to be the largest-ever financial penalty ordered by FINRA, is just one of several unknowns that could severely hamper Robinhood.
Also, if there’s one thing that might make any investor (or potential investor) pause, it’s the 74-page section on risk factors associated with Robinhood.
The reality of investing online is that very few self-directed investors see the level of technical and regulatory complexity associated with being an online brokerage, and this complexity only increases when dealing with tightly interconnected technology and cryptocurrencies.
Separating the rhetoric from the numbers is going to be an ongoing reality with Robinhood. On the one hand, they are clearly trying to position themselves as the champions of personal financial well-being by pursuing a vision of becoming the “most trusted and most culturally relevant money app worldwide.” On the other hand, being able to grow going forward at the speed and scale they have to date will be costly. Regulatory issues go beyond just a slap on the wrist financially, they also erode confidence of investors and clients. The reputation of being a “rule breaker” does not bode well in the world of finance, even if the ultimate vision is supposedly a noble one.
The most recent quarterly numbers, indeed the numbers over the past year too, indicate that Robinhood has reached an inflection point in their business.
Thanks to much hard work to get them ready to grow, they were handed a generational opportunity to grow their business when COVID-19 struck. It seems, however, that for the moment, markets have returned to calmer tendencies. Robinhood managed to thrive in chaos, however, now that it is a public company answerable to so many more stakeholders, it must successfully avoid creating chaos for itself.
New Feature-palooza: BMO InvestorLine Rolls Out More New Features
Another summer week and another string of new feature releases from Canadian online brokerages.
This past week, popular bank-owned online broker BMO InvestorLine published an announcement of some recent feature enhancements to the InvestorLine and Advice Direct platforms. Late last year, BMO InvestorLine debuted the rollout of InvestorLine 2.0 which represented a significant overhaul of their web-based online investing platform.
In the latest iteration of their platform, there have been some noteworthy feature enhancements, such as faster order entry (hooray!) and visibility on distributions (such as dividends) paid by certain securities.
To their credit, BMO InvestorLine has maintained a cleaner user experience in their new 2.0 platform so that understanding information and analytics about companies “feels” easier and more intuitive. As subjective as those measures are, the new site is objectively less cluttered with fewer menus to navigate around and more prominence given to the core features used by most online investors. That said, it is still clearly a work in progress with certain features only available on the previous version of the site.
Another interesting feature mentioned in the same press release is a partnership with Canadian personal finance expert Preet Banerjee to launch an investor education series. Earlier this month, the first 18 episode video series launched and another intermediate level course (32 videos long) is slated to come mid-September.
Finally, although it wasn’t mentioned directly in their press release, BMO InvestorLine is working hard in the background to improve response times to customer service and enhance the online experience for investors trying to connect with representatives on the phone. In the press release, there was a mention of being able to connect with InvestorLine representatives by video, however, the more compelling note is actually displayed on the login page for the online brokerage.
As seen in the image below, the announcement of the average wait time is still a unique feature that other online brokerages, especially big bank-owned brokerages, aren’t doing. This small but important number offers some level of transparency on what it’s like to connect with InvestorLine reps via telephone. What caught our eye, however, was the mention of call back features and the accelerated ramp up in hiring of client service agents.
With just under a month left in the summer (gasp!), the pace of activity among Canadian online brokerages is already starting to show signs of accelerating. While that might not seem unusual considering September is when individuals are back from vacation, the fact is that this entire summer has been a roller-coaster ride of activity.
Unlike some other Canadian online brokerages who have announced new feature drops almost weekly, BMO InvestorLine has rolled out several big improvements at once, and when combined with their announcement earlier this summer of commission-free ETFs, it seems like there is something big planned for the upcoming RSP season at BMO InvestorLine. That said, it’s hard to envision BMO InvestorLine’s big-bank peers standing still.
Though things have been quiet at other firms, if BMO InvestorLine is any indicator of things to come, it seems like we’re in for some more big news this fall.
From the Forums
Death in the Family
It’s never an easy subject to bring up but talking about death and what happens to an online brokerage account is something all online investors should be aware of. In this instructive post from the Financial Wisdom Forum, one user’s experience dealing with a deceased spouse’s brokerage account offers some valuable lessons to seasoned investors.
What’s in a Name?
In the decade or so that we’ve been covering the world of online investing, it’s been fascinating to witness the evolution of what the industry brands itself to be. From discount brokerage to online brokerage to direct investing, this post was interesting because it shows that online investors are starting to pick up on the industry term “self-directed” in how they view themselves. Also, there’s a bonus rumour revealed in the post, which if true, is a heck of a bombshell.
Into the Close
If you’ve made it this far, you deserve a round of applause! With just a few weeks left to enjoy the summer, we highly recommend taking any kind of break to soak up the sunshine or just take a breather. Of course, if rollercoasters are your thing and you don’t have a chance to actually ride them, sit tight (and keep your hands in the car), the online brokerage news is going to have some very wild times ahead!