Last year, stock-trading company Robinhood, a startup focused on providing free equity trading services, began the process of monetizing its business model. The company’s main target customers are younger, technologically skilled investors with less need for the more advanced, expensive services of traditional brokerages.
Robinhood encourages its investors to heavily trade accounts by offering free trades. A recently introduced premium feature, named Gold, is a monthly service with tiered levels of buying power in addition to offering new access to margin lending (debt) and after-hours trading sessions. We equate this to giving a loaded weapon to someone without any weapons training. By throwing in enhanced margin abilities and after hours trading, all you have done is give them more ammunition and turned off the lights. Robin Hood’s business model is monetized based around the fees they can generate from having investors utilize their margin program.
Much of the Robinhood growth model is based on higher trading and borrowing activity. They specifically detail the ability for their clients to play corporate earnings announcements by providing access to after-hours market trading sessions. This type of event driven trading is complicated even for the world’s most sophisticated hedge funds, let alone for young investors. When a company announces earnings or another event (i.e. M&A, divestitures, bankruptcy), its stock price may make a significant move, with minimal liquidity, creating major winners and losers in the process. New investors, without experience trading corporate events, may be enticed to these strategies by the large potential returns, but without understanding the risks involved.
Margin trading is the financing of asset purchases with debt. That loan is typically secured by the assets, which typically include equities and fixed income securities, as collateral. If the assets’ value falls below the initial purchase price, which leaves the loan “underwater,” the margin lender may ask for cash or terminate the transaction altogether and sell the securities. The use of leverage in this type of transaction has the ability to both amplify the gains, but also to dramatically increase the loss potential. Trading on margin requires a great deal of experience not only with investing generally, but also with margin-specific concepts like collateral management.
The concept of low-cost, even free, trading is an important tool in educating young investors about public markets and companies. However, such a tool must not be corrupted by pushing more advanced, risky trading strategies that are not appropriate for the retail investor. Undermining its customer base with a set of products to which it is unaccustomed or unprepared for is not a long-term solution for its monetization model. As the brokerage world has started a race to the bottom when it comes to trade costs, Robin Hood has put in the floor at free.
If you are younger investor who feels you could use some guidance, visit Midwest Wealth Management at www.midwest-wealth.com or call us at 317-288-4989.
Many of our client’s children and grandchildren are beginning to graduate college, and they could not be happier. After all the trials and tribulations that come with being a parent, this is one of the truly rewarding experiences. It is after this walk across the stage that clients start to experience a mix of emotions: their children permanently leave home, tuition payments cease and they become a spectator to the decisions that lie ahead.
This often times becomes an unfortunate scenario, because as parents you still have so much to offer. Being able to draw from your own personal experiences and mistakes you or your peers made are very valuable experiences to share as your children begin to enter the “real world.” As much as future generations love to argue that things are not the same as they use to be, many of the same actions happen on a very similar timeline (Ages 22-32). Regardless of what decade you were born in, these things have almost remained a constant:
o Beginning of Career (First, Second, Third Job)
o Apartment Rental or Home Purchase
o Wedding Funding & Marriage expenses
These all become major events in the path towards adulthood and ultimately a successful future, but the one theme we as wealth managers point to is that they all have a big impact on your financial future. Done incorrectly or at an inopportune time, the effects can be lasting and ultimately alter lifestyle and retirement choices.
As clients would continue to voice their frustration with the lack of fiscal direction their children had or the inability to communicate with them on these subject matters, we saw it as a great opportunity to help be in intermediary in this area. The parents have trusted us with the family’s wealth and wanted the same level of support and fiscal education for their children- So we built a program helped to bridge this gap, knows as the YP Access Program.
The YP Access Program helps young investors establish a trusting, working relationship well before the discussions of investing for retirement happen. This is done by giving personalized planning advice, asset allocation, risk assessment and industry insight that many high-end professionals, entrepreneurs, and foundations have leveraged for years. Below are some of the best practices we have been able to assist clients with:
Emergency Fund– We normally recommend 3-6 months living expenses, set aside immediately. This is the first opportunity to prove independence, you do not want to have it short lived by not being prepared for life’s often unexpected expenses.
Budgeting- With a new paycheck bi-weekly, recent graduates can get caught up in the idea of being able to immediately replenish funds. Understand what your fixed overhead expenses and create your budget around that.
Savings- This is the most difficult conversation to have, because it is often tough for recent graduates to see the big picture. The first place we start is to make sure that contributions to an employer sponsor plan are being contributed at a minimum to what their employer will match. There is no other place that can guarantee you 100% return like the matching program in employer-sponsored plan.
Salary Negotiation- Just like in investing, the effect of compounding return can have a significant impact in regards to the salary at your job. Do not be afraid to ask early in your career (if warranted) for a raise. Employers expect this as part of the employer/employee relationship and one of the worst mistakes they can make it just settling for what the employer offers. Five or ten years down the road that 7% raise could be worth much more had it been compounded off of earlier incremental salary raises.
“Hedonic Treadmill”– This is a theory that states regardless of any major positive or negative events, we quickly return to the same level of happiness. The danger here is that the more we have, the more our expectations rise and temptation to splurge or expectations can rise. Young professionals need to realize that many of benefits their parents enjoy are not going to come immediately and it is a process to get to that point.
About Midwest Wealth Management, Inc.
Midwest Wealth Management, Inc. was formed by Greg Shields, a 30-year financial services veteran to offer sophisticated investors an alternative when looking for a more strategic path for long-term investing. As a private investment group, Midwest Wealth Management, Inc. offers a proprietary trading platform, alternative investment offerings and dedicated advisory support for a select audience. For more information, please visit www.midwest-wealth.com
While the U.S. economy continues to outperform those of other advanced countries, there is an acute threat to this trend moving forward: the lack of savings by large segments of the U.S. population.
To most observers, low savings would simply be a manifestation of low incomes. But that is not the case, in fact the numbers are startling.
Less than $1,000 in Savings by Houshold Earnings:
$100k-150k: 44% Greater than $150,000: 29% Less than $25,000: 73%
In total, 7 out of 10 Americans have less than $1,000 in savings! The initial reaction is how is this possible? But looking at the underlying numbers of our economy help give clarity to the situation. Approximately 70% of America’s Gross Domestic Product is tied to the consumer, making the economy extraordinarily vulnerable to changes in purchasing power and levels of indebtedness. Indeed, at present, there is a significant probability that elevated levels of consumer borrowing, driven by the rise of credit cards and advanced payment platforms, will lead to greater defaults as many consumers find it much easier to spend money when they are not dealing with tangible cash.
According to investment bank UBS AG, the percentage of consumers who expect to default on their obligations has increased by a full five percentage points since September 2016: that nearly 17% of borrowers will miss a loan payment in the next twelve months.
Risks to Households and Economic Growth
The combination of a low savings rate and high levels of consumer indebtedness pose serious risks to households and the broader U.S. economy. Without a significant enough backstop, households can face serious problems in the case of unforeseen expenses, work disruptions or overall macroeconomic underperformance. Additionally, large debts to credit card issuers typically have dramatically higher interest rates than home or auto loans, making the cost of overconsumption even more difficult to handle in later years. Without a so-called “rainy day” fund of savings, households at the margins will become increasingly reliant on government transfer programs, such as Medicaid (health care) and Social Security. Without corresponding increases in taxes or deep spending cuts, the long-term fiscal viability of the U.S. government would be threatened.
While the savings/consumption matrix currently points negative, the situation is solvable. Further economic growth will help households by providing more cash with which to pay down debt, while also beginning to set aside more for a difficult time. Potential changes in public policy should also make the economics of saving dramatically more attractive. Current proposals to impose consumption-style taxation and reduce marginal tax rates would increase and decrease the cost of consumption and savings, respectively. If households do not take these risks seriously, however, the fallout from the resulting economic dislocation will require quick, decisive action.
If you have concerns about your savings and being able to fund your future goals, visit Midwest Wealth Management at www.midwest-wealth.com or call us at 317-288-4989.