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Pitfalls of High-Volume Trading on Online Platforms Show Value of FAs

By Miriam Rozen September 16, 2020

Outage issues and losses experienced by high-volume trading investors on self-directed, zero-commission platforms underscore the value of financial advisors, members of that profession say.

Earlier this month, investors complained on social media about access issues on online platforms, such as Robinhood, Vanguard, Charles Schwab and TD Ameritrade. Robinhood is facing at least three lawsuits over trading glitches it experienced in March. In June, Robinhood said it will revamp how it handles options trading in light of the suicide of one of its customers who had a negative $730,000 cash balance in his account that turned out to be temporary.  

The growth of zero-commission trading platforms has prompted “uninformed investors” without advisors to self-churn in their own accounts and incur losses, says Jim Ray, a Skokie, Ill.-based advisor at IHT Wealth Management, which manages more than $2.4 billion in client assets.

“It’s not the proper way to invest,” says William Jeter, an advisor at Abacus Planning Group in Columbia, S.C., an RIA managing almost $1.3 billion in client assets.

Jeter says the goal of his firm, which uses Charles Schwab and TD Ameritrade to custody clients’ assets, is the opposite of the excessive trading seen on platforms like Robinhood.  

“At Abacus, we like to minimize trades,” Jeter says. “It keeps trading fees and taxes down and keeps us invested for the long term.”

Abacus advisors also make sure clients have sufficient cash flow so no urgent trades are required for liquidity purposes, Jeter says. 

“We plan out regular cash-flow needs for our clients and ladder individual bonds to meet those needs, so we usually don’t need to place any trades for regular cash flow needs,” he says.

“Whenever a client is going to require a large cash outflow, we encourage them to give us as much notice as possible, and unless the market is way down, we create the cash well before there is a need,” he adds.

As one additional precaution, Abacus enables margin loans on all accounts, Jeter says.

“If there is some sort of odd scenario at Schwab or TD … where a client cannot wait one extra day to place a trade, they will have to spend a day on margin,” he says, although he notes that scenario is “not ideal.”  

But “one day on margin is probably a small price to pay for answering such an urgent cash need, and I believe Schwab or TD would be willing to waive the margin interest in the event a glitch in their system caused the error,” he adds.

The Robinhood model

 Jeter believes majority of investors don’t belong on the Robinhood model of trading.

 “Robinhood was built, in my opinion, to encourage leverage and frequent trading. That’s something that 99% of investors should not be participating in,” he says.

 Robinhood representatives push back, however, on the notion that the company’s platform encourages self-sabotaging behavior among investors. What the platform does is democratize investing, they say, echoing the firms’ “investing for everyone” slogan on its website.

Robinhood's user numbers have risen significantly in recent months — from three million users in the first quarter to 13 million in August, as reported by The Financial Times.

“Robinhood eliminated barriers that have kept people out of investing, including commissions, account minimums and fees that are charged by many financial advisors. There should be room for everyone in the markets, not just the wealthy and Wall Street professionals,” Jason Warnick, Robinhood’s chief financial officer tells FA-IQ in an emailed statement.

A Robinhood spokesperson stresses that the platform offers no investment recommendations and says most of its customers — who on average are 31 years old and first-time investors — adopt a "buy and hold" strategy.

Robinhood’s business model helps “remove barriers,” allows “more people to participate in the market,” and “has been a catalyst for established players to start offering low-cost options,” the spokesperson writes in an email.

Last month, LPL Financial managing director and divisional president for business development Rich Steinmeier said advisors need not fear robo-advisors because they will fall short of what FAs can offer.

“I don’t think our advisors are going to be disintermediated because, ultimately, the advisor-client relationship, those are the ties that bind,” he said at LPL’s annual conference.

Order flow payments

Meanwhile, Robinhood is also reportedly the target of an SEC investigation over disclosures about how it routed customers’ orders. The probe is said to be specifically focused on how until 2018, Robinhood’s website failed to disclose that it earned payments from high-speed trading outfits for sending them its customers’ stock and option orders. 

Robinhood declines to comment on the reported investigation, according to the spokesperson.

The spokesperson notes, however, that order flow payments qualify as “a common, legal and regulated industry business practice” and the firm strives “to maintain constructive relationships” and “cooperate fully” with regulators.

When asked about the multiple outages so far this year, the spokesperson writes that Robinhood remains “continually focused on strengthening our infrastructure and improving reliability.”

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Tags:  Client retention , Technology , Regulatory/legal issues , Investment strategies , Portfolio management , Behavioral finance , Marketing , Charles Schwab , LPL Financial , TD Ameritrade , Vanguard

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