Are free trades next for digital advice?

Digital investment platforms always talk the long game when it comes to investing, making anyone who mentions the idea of timing the markets an instant heretic that should be carted through town and tied to the proverbial stake.

Enter Wealthsimple.

The company behind one of Canada's largest investing platforms launched Wealth Trade in March of last year letting clients buy and sell thousands of stocks and ETFs with zero commissions and no account minimums. An increase in users during the worst of the pandemic helped Wealthsimple more than triple its client base within the last six months, according to a spokesperson.

If that growth trajectory sounds familiar, it should.

Robinhood, the heavyweight champion of free trades, said in May that 3 million new funded accounts were added in 2020, with half of the new customers being first-time investors who signed up during the lockdown. It also announced new funding in August, pushing the company’s valuation to $11.2 billion.

Not to be outdone, Wealthsimple landed a fresh $87 million funding round this month, catapulting the company into the unicorn conversation with a valuation just topping $1 billion.

“Robinhood has done a great job at building game mechanics around trading whereas Wealthsimple’s ethos is about wealth generation over time, or getting rich slowly,” David Yuan, a general partner at TCV, which led the latest funding round, told Bloomberg News. “The pandemic has been a strong tailwind for the business,” Yuan said, who will also sit on Wealthsimple’s board.

The frenetic growth, pushed at least in part by Wealth Trade, is also at odds with the company’s “Get rich slowly” motto and may have broader implications on the larger digital investing industry. Some users are asking for riskier products like options trading and margin accounts that are offered on competing platforms, CEO Michael Katchen told Bloomberg.

As of July, Wealthsimple claimed 1.5 million users globally with assets under administration of more than $8.4 billion, compared with just $4.9 billion during the same period a year ago, according to the second-quarter earnings report from Power Corporation Canada, which holds a controlling interest in the company. That’s a meteoric 72% increase in asset growth year over year.

Will the allure of free trades entice other firms to jump on board?

While business has been booming, the digital advice industry is notorious for razor-thin margins and more than a handful of promising upstarts have already bowed out in recent months (WiseBanyan, Swell, Hedgeable, Qplum). The ones remaining have had to tack on additional products — like cash management tools and even cell phone insurance — to prop up revenue streams and attract additional assets.

While Wealthsimple, Robinhood, and other notable digital advisers like SoFi have had success, robo-advisers this side of the international boundary are much less likely to dip their toes into the zero-commission waters. Robinhood has witnessed historic growth but has also been the subject of scathing criticism for potentially introducing risky and sometimes dangerous trading techniques to novice investors.

Let’s not forget, it would be an abrupt about-face if any of the independent advice platforms that have long championed passive investments suddenly offered zero-commission trades. But it remains a tantalizing possibility — especially at the many fledgling upstarts where revenue, not to mention profits, has become increasingly hard to find.