: A burning question to ask before buying Robinhood IPO stock — will users ‘age out’ of the app?

More than half of Robinhood’s users are first-time investors and 31 is median age of all users, according to the company’s prospectus.

So do they want to grow old with Robinhood?

That’s a question and a long-term challenge that investors ought to weigh before they purchase shares in the company’s initial public offering, according to William Whitt, senior analyst at Aite-Novarica Group, a market research firm.

“As Robinhood investors grow older and accumulate wealth, and their finances become more complex, they will be looking for more services from their primary provider,” said Whitt, who focuses on various aspects of the wealth management industry, including online brokerages.

“If Robinhood wants to remain the permanent place where they go for their investments, they’ll need to build out their services,” he added.

Robinhood will devote between 20% to 35% of its shares for retail investors in a valuation of approximately $35.1 billion.

‘I’m not missing out’

It’s been six years since Michael Farrar opened his Robinhood brokerage account, and the 24-year-old has no plans to close it anytime soon.

The Beaumont, Calif.-based certified public accountant says he might think differently if he encounters a nasty market crash or if he suddenly comes into mounds of money — or even if he just feels ready for someone else to manage his passive income.

But for now, Farrar doesn’t foresee paying a financial adviser to carry out his investment strategies or switching to another brokerage platform 10 years from now, 20 years from now and beyond.

“I don’t see it as necessary at all,” Farrar said, later adding, “I’m not missing out on anything with Robinhood for what I want to do.”

He sold most of his cruise, airline and tech stocks in the spring (and making out nicely in the winter’s meme stock frenzy). Farrar, who describes himself as having a “high risk tolerance,” has about $10,000 left in his Robinhood account.

He is now taking a breather on trading — that is, except for trying to buy a couple shares of Robinhood itself when public trading begins Thursday on the company, which has around 18 million accounts.

“I’m confident enough in this company that I’m willing to gamble my learning experience,” said Farrar, who’s never purchased IPO shares before.

Robinhood
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is counting on the existence of a lot more people like Farrar, and not just because he’s eyeing company stock.

That would mean offerings like the mix of adviser services that Vanguard, Fidelity Investments and Charles Schwab Corp.
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+1.41%
all have in addition to their brokerage platform, Whitt said.

It could also include Robinhood’s own special brew of ETFs or index funds, he added.

So how does Robinhood compare? The average age of a retail investor using Schwab’s brokerage platform is 49, including people who use TD Ameritrade, which Schwab owns, according to a spokesman.

The other side of the argument: Even though an older client base will have more assets, established brokerage firms are obviously keen to attract Robinhood’s army of young, hungry investors.

The median age of a Vanguard retail client is 54 for people using Vanguard as a brokerage account and people with a mutual-fund only account, but 39 for Vanguard’s robo-adviser clientele, a spokesman said.

Fidelity has 29 million retail brokerage accounts, of which 3.5 million were opened in the first quarter of 2021, according to a spokeswoman. Of those newly-opened accounts in the first quarter, 1.6 million were opened by people 35 and younger.

Like Robinhood, Vanguard, Schwab and Fidelity are all zero-commission.

Robinhood’s press representatives did not respond to a request for comment, but the company’s prospectus acknowledges there’s no guarantee of a growing customer base, especially if people have less time to devote to their investments after the pandemic — and beyond.

During 2021’s first quarter, Robinhood saw an increase in customers switching to other broker-dealers, the company’s SEC filing said. Just over 200,000 accounts — worth $4.1 billion combined — transferred out; that’s compared to the 22,000 accounts that transferred out on average each quarter in fiscal year 2020.

In a webcast ahead of the IPO, Vladimir Tenev, Robinhood’s co-founder and co-CEO said the company was considering rolling out IRA and Roth IRA accounts, the tax-advantaged retirement accounts people build up for their golden years.

“We want to make first-time investors into long-term investors,” he said.

Managing a portfolio vs. a position

Robinhood’s IPO arrives as retail investors are coming into their own. In the wake of the most recent stimulus package, a wave of these younger investors could be spending $170 billion on equities by one estimate.

They accounted for around 20% of stock-market trading volume last year; that’s double the rate from 2010, Robinhood noted in its filing.

The company knows this can bring pressures too, especially after the GameStop
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trading saga earlier this year. Robinhood temporarily restricted trading because it didn’t have enough collateral to handle the “buy” order deluge, Tenev told federal lawmakers.

Most of the platform’s users were buy-and-hold investors, not day traders, he added.

But in the view of Chris Chen, a Boston-area based financial adviser, the Robinhood experience “is not an interface that actually allows you to manage a portfolio. It lets you manage a position.”

There’s a difference, and one day overconfident users might lose a lot as a result, he said.

Chen has a Robinhood account where he plays with a small bitcoin
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investment. He likes it for his own experience and to understand the experience of several 40-something clients who have their own accounts.

“Their serious money is not with Robinhood,” Chen said.

The “serious money” counts as the money these clients want for their nest egg and their funds to one day pass on to the next generation. “The money they don’t want to lose,” Chen said.

Farrar’s father and grandfather also have Robinhood accounts, Farrar noted. “They use it for their ‘play around’ investments.”

Less complicated financial lives

Younger investors tend to have less complicated financial lives, Whitt said.

Someone out of college might have student loans, rent and other day-to-day expenses to cover before they have the time and disposable income to put towards investments, he said.

As they get older, however, they might have kids, a mortgage, business dealings, inheritances and other money obligations and opportunities vying for their attention.

“Suddenly, you’re not an expert anymore. As things get more complicated, it’s hard to be an expert in those areas,” he said.

Whitt pointed to a Federal Reserve’s Survey of Consumer Finances data indicating how people with more assets shift to professional advisers.

Among households with brokerage accounts, just over half with investable assets up to $100,000 said they were predominantly self-directed and 17% said they were predominantly reliant on professional financial advice, according to Whitt.

For households with $100,000 to $1 million in assets, 41% predominantly handled their investments themselves and 21% leaned mostly on advisers, he said. In families above the $1 million mark, 40% said they predominantly did it themselves and 27% they by-and-large depended on advisers, Whitt noted.

Robinhood’s median customer account was $240 and the average account was about $5,000, according to Tenev’s Congressional testimony in February.

Both Chen and Farrar say many young investors may find it hard to one day stomach adviser fees when they’ve started out with no costs on Robinhood.

If users ultimately turn away from Robinhood and the share price declines, Farrar will deal with that situation if it arises.

But that’s for the future.

Just like social-media apps like Facebook FB
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and Instagram, Farrar is betting on people staying.

“You get used to something, and keep using it,” he said.