"Robinhood Markets has come a long way, but it still hasn't made the leap into offering full-fledged investment advice. Its latest acquisition, though, might point the way toward how it could someday do that.
On Monday, Robinhood said it had acquired Pluto Capital, which, according to the deal announcement, offers investment research powered by artificial intelligence and "delivers highly customized investment strategies based on customer needs and financial goals."
Such information can, of course, help people make their own investment decisions. But Pluto doesn't do what a so-called robo adviser does, which is to actually manage assets and make those trades for users.
So what if it eventually does? Robinhood didn't outline how it might specifically integrate Pluto's investment research. And, while Robinhood has put becoming an investment adviser on its road map, it doesn't now provide that service.
Offering some kind of adviser product arguably would be an ideal fit for one of its newest, splashiest products: retirement accounts. While there are people who use self-directed investment retirement accounts, trading in them like you might with taxable "play" money, many Americans are also accustomed to having retirement money managed for them by a pension provider, an adviser or through something like a target-date fund.
If Robinhood were to get into the business of helping to actually manage customers' assets and advise on financial decisions rather than just giving them tools to do it themselves, the question is also how it would fit into its business more generally.
Robinhood has moved toward profitability in part by lowering costs. Hiring good advisers is pricey, as is handling phone calls or meetings with customers nervous about what is happening with their money.
Last year, Robinhood Chief Executive Vlad Tenev told analysts that the company was looking at advisory services. But, he said, "we definitely don't want to build another me-too robo that just puts you into a basket of ETFs." He added that he saw an opportunity to offer "high-end financial advice" but "at a really attractive price point using modern technology and make that available to everyone."
Robinhood's claim to fame early on was free trading.
Other online brokers later followed it, but they were also making lots of money from customers' cash and broader investment assets. Robinhood has increasingly diversified, particularly taking advantage of rising interest rates to earn more on cash. Further adding a steady stream of management fees could be a serious boost to Robinhood's shares over time. Investors tend to award those revenues a high multiple.
Earlier this year, Robinhood's Chief Financial Officer Jason Warnick, in response to an analyst question about more-consistent revenue, said that the company now had much more balanced revenue beyond trading, including recent additions such as credit cards and the growing paying subscriber base for its Gold service. "Over time, it's things like going into [assets under management]-based fee models, things like advisory," he said. "These are all things that are on our minds over a longer term," but he added it was too early to say how Robinhood would handle such fees.
Though hundreds of billions of dollars in the U.S. were estimated to be managed via robo advisers, it was still just a slice of the tens of trillions in the U.S. retail client asset market, according to figures compiled by Morningstar in a report last year. It also is a highly competitive space, with both independents and big established firms offering a variety of automated services, including some with hybrid human advice.
It wouldn't be easy for Robinhood to steal other managers' assets, but advisory might be one critical component to drawing in a wider array of customers. That would give its younger, more risk-loving members less reason to go elsewhere as they mature." [1]
1. AI Gives Robinhood Another Weapon. Demos, Telis. Wall Street Journal, Eastern edition; New York, N.Y.. 03 July 2024: B.12.
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