Why I’m Leaving Robinhood for Schwab
It’s not you Robinhood, it’s me. Well, actually, it’s mostly you.
I have two investment accounts. One is a ROTH IRA through Charles Schwab where I plan to buy ETFs and hold them forever. I chose Schwab because they offered commission-free trades (this was two years ago, before their recent announcement) on their own ETFs. The other account I have is an individual brokerage account where I buy common stocks.
I originally chose Robinhood for this individual account. I knew they had a limited offering from a trading perspective (No DRIPs, IRAs, etc.) compared to the big online brokerages, but they had one huge thing the others didn’t offer: zero commissions. Not paying for trades is big for someone, like me, that is buying less than 10 shares of a stock at a time and likes to dollar-cost-average into positions.
But as you probably heard, Charles Schwab (along with TD Ameritrade and eTrade) just dropped their commissions to zero, essentially offering the same fee structure as Robinhood to their customers. Stop and think for a moment how great this is for the individual investor. You can now buy almost any stock in the world at zero-cost (not including the HFTs, of course) with a simple click of a button. That is amazing.
On the news I immediately knew what I was going to do: move my account back to Schwab. It was an easy choice. In my book, Schwab has better or equal options in everything that matters for longterm investors. Sure, Robinhood has a better user interface and newsfeed, but do those features actually provide value to investors? My thinking is no.
Robinhood Will Struggle to Keep Users
As a young person who wants to invest in individual stocks, I am the customer demographic that Robinhood targets. The problem is, Robinhood was a one-trick pony, and overnight that trick has become obsolete. I have zero customer loyalty to them and believe many others do as well. That’s why I think with no competitive advantage Robinhood will lose or fail to grow very many users from this point forward.
That will be tough because Robinhood’s valuation of $7.6 billion is entirely based on user growth. According to reports, they grew users from 4 million to 6 million in the second half of 2018, an astounding rate for an online brokerage firm. If I was an investor in the company, I would be worried about stagnating user growth and low revenue per user (i.e. users who own .01 Bitcoin).
Robinhood lost me as a user. If others follow suit, don’t be shocked if their valuation falls 50% or more in the coming years.
Disclosure: the author is not a financial advisor, and may have an interest in the companies discussed.