Will commission-free trading apps impact trading culture?

09 June 2021

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Question by James

I'd be interested in hearing your view on commission free trading apps (Freetrade, Trading 212, Robinhood etc).

Specifically their impact on trading culture and landscape, how useful and credible they are as investment portals and whether you think they'll disrupt the market longer term or are they facilitating a short term spike in investing, much like the pre dot com bubble.

Many thanks in advance,

James


Answered by Adam Johnson

Thanks, James.

A very topical question given the news around GameStop and the Robinhood platform.

In the execution only space, including trading platforms, a race to the lowest charges is inevitable. I am not sure these will inherently change or disrupt the market long-term though. They will facilitate behaviour change but they are not a cause of change themselves. Social media allows people to communicate and share information much faster than before. To this extent, you can see how bubbles can be formed far more quickly as certain ideas get hyped up. This has the potential to be like the dot.com bubble in the late 90’s, but at a much faster scale.

In terms of investment advice, the key is having a well-managed and diversified portfolio that is designed around your objectives and risk profile. These platforms allow easy self-trading very cheaply, but self-trading exposes the gap between cost and value. Numis have produced a report that shows that getting financial advice is worth around an extra 3% per year in client returns.

In terms of the recent bubble around GameStop, Jordan Belfort said ‘You must be so careful because eventually these stocks are going to come crashing back down to earth’. He goes on to warn that investors could lose everything. This warning serves to highlight that this type of investing is like not investing in the conventional sense but is much akin to gambling.

So in answer to your question, I do not think the platforms will change anything, they will facilitate people to make bigger mistakes with greater ease as social media stokes the fire of a particular ideas. These bubbles are nothing new but we will see them more often and more people will fall victim. The wider observation is that social media seems full of experts; it seems I can go online and get expert advice about what is wrong with my dog, why COVID is fake and how to cure cancer. Social media is not the place for looking for reliable, expert advice and this extends to managing your finances. Speaking to a Chartered Financial Planner is a far more effective way of achieving long-term financial goals.

Answered by

Adam Johnson

Director

Helping deliver client outcomes is at the heart of everything Adam does. Helping clients achieve their dreams is what motivates Adam as a financial adviser, and he takes great pride in the way he has helped so many families over two decades of providing financial advice, and fifteen years running his own practice.