Robinhood tiptoes into wealth management with the ‘recommendations’ engine

October 27, 2021

Robinhood Financial began piloting a roboadvisor wealth management tool last week, which it called a “recommendations engine,” the company said in documents filed Tuesday.

The online tool, which is being tested with a small group of new clients, asks investors to answer a series of questions based on “risk tolerance, income and self-reported financial goals,” a door said. – company speech in a press release detailing the new program. .

“From there, clients will receive a recommended portfolio of securities to help them inform their investments,” the spokesperson added.

The company said on the record that it will continue to expand the rollout of the product over the next six months. The tool first directs consumers to four exchange-traded funds (ETFs) already available on the Robinhood platform.

The ETFs on offer are all low-cost and index-based, varying across different asset classes and geographies, depending on the company.

“Robinhood has heard from newbie investors that they want more information on how to get started when they open an account with us,” the spokesperson said.

According to the company, Robinhood officials have worked with regulators to ensure the product meets the adequacy rules of the Financial Industry Regulatory Authority and the Securities and Exchange Commission Best Interests Regulation. .

In discussing its quarterly results, executives on calls with analysts did not specifically address the tool, but discussed their broader ambitions to expand beyond commission-free business roots.

Robinhood remains “focused on our vision of creating a single currency application for our customers,” Vlad Tenev, CEO of the company, told analysts.

In the same call, Tenev outlined his goal of deploying a tool for tax-deferred retirement accounts, specifically individual retirement accounts, IRAs.

“We don’t have specific details yet on the timeline, but I’ll tell you that it fits very well with our mission. We want everyone to be an investor, and tax-advantaged accounts do a lot and are important to clients, as a way to encourage long-term investment behavior, ”Tenev said.

Analysts have welcomed the idea of ​​Robinhood entering the wealth management space as a way to retain their audience of mostly younger investors as they grow older and to encourage clients to add more. active.

“I have been advocating for a long time that they create or buy a robot advisor or some sort of investment management affiliate so that assets get stickier,” Mason Thomas, research analyst S&P Global Market Intelligence, said in an interview. . “You get more net interest income, bigger account balances. “

But Thomas has expressed some concerns that Robinhood will meet regulators’ requirements for financial advisers. “If I had to go by what they’ve done historically, I think they’re probably trying to create a product that looks like wealth management without really jumping through all the hoops,” Thomas said.

In recent months, regulators have been raining on Robinhood.

In May, The Massachusetts securities regulator has been given the green light from a court to continue its pending lawsuit to enforce a fiduciary standard of care against Robinhood over its self-directed trading tools. If the state wins in this case, Robinhood would have to repay its profits, pay fines and change its business strategy in Massachusetts.

In June, the company has agreed with Finra to pay a $ 70 million fine for widespread defaults, including negligently deceiving millions of customers on critical issues related to their account balances, allowing ineligible customers to trade on margin and failing to report thousands of customer complaints.

It was also the target of SEC Chairman Gary Gensler, who repeatedly pointed out during the summer regarding possible regulatory reform on the self-managed company’s order flow gamification and payment (PFOF) practices. PFOF allows Robinhood and other brokers to collect fees for transactions routed through a clearing house by that clearing house.

In its documents filed for its initial public offering earlier this year, Robinhood acknowledged as one of its risk factors: regulators could interpret some of its investment education tools to constitute “investment advice or recommendations.” “.

“New regulations, such as the SEC’s best interest regulations and some state brokerage regulations, will impose stricter standards and requirements of conduct if we are deemed to provide recommendations to retail investors,” he said. declared the company.