Democratising finance for all? An investment app for amateurs and a student trader’s death
On 12 June, 20-year-old student Alex Kearns killed himself, believing that he had just lost $730,000 (£580,000) through a smartphone app. To compound the tragedy, his despair was entirely needless. Far from having doomed himself to a lifetime of debt, he had, it appears, simply misunderstood what the app was telling him.
The staggering sum may have looked like a loss but was, in fact, a temporary position on an option, a financial instrument of which he had little understanding. His account was actually in credit, to the tune of $16,000.
Kearns was one of more than 13 million users of Robinhood, which has shaken up the world of stock market investing by waiving commission fees, making it cheaper and easier for ordinary people to trade, regardless of experience.
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Soon Robinhood will accept customers in the UK, after receiving the blessing of the Financial Conduct Authority. The UK waiting list has already reached 250,000 people ahead of a launch planned for some time this year.
The app’s name nods to the notion of giving the “poor” access to the glamorous domain of rich traders, “democratizing finance for all” in the words of its official Twitter feed. But the image of an army of Robin Hoods gatecrashing the financiers’ lucrative party sits uncomfortably alongside the reality.
The app’s founders, Stanford University graduates Baiju Bhatt and Vladimir Tenev, have become billionaires in the space of a few years, building their business into a steamroller success worth $8.6bn (£6.9bn), according to a recent funding round.
Much of the company’s income appears to be derived from financial services companies that pay for a steady stream of orders for trades, raising questions about a conflict of interest.
Professional Wall Street traders regularly swap Robinhood memes mocking the irrational and reckless behaviour of its legions of small-scale retail investors. With a median age of 31, according to the company, those users are typically young and often first-time investors, clothing themselves in the trappings of a City trader without a minute of relevant training.
In a note left for his family, Kearns admitted he had “no clue” what he was doing and had not meant to take on so much risk.
Bill Brewster, a private investor and relative of the Kearns family who speaks on their behalf, feels the company must shoulder some of the blame. “If you’re growing that rapidly and courting young people, who are by definition less experienced, you at a minimum have a duty to perhaps have a pop-up that says this isn’t a real exposure, or if this number is shocking, here’s our explanation of what it is.
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“It’s hard for me to reconcile their being smart tech people with great design while also overlooking what I perceive to be a fairly foreseeable problem.”
US politicians have lined up to demand that the company do more to protect vulnerable young people. “If any investor can’t understand, in plain English, what they’re signing on to, then something needs to change,” said Sean Casten, a democrat congressman for Kearns’ home state of Illinois who signed an open letter to the company.
The company was quick to show that it was responding to Kearns’ death. It promised to review customers’ eligibility to trade more complex instruments and to make it clearer to customers exactly what, and how much, they are trading.
“While we recognise that nothing can ease the pain that Alex’s family is feeling now, in addition to the steps above, Robinhood is making a $250,000 donation to the American Foundation for Suicide Prevention,” wrote Bhatt and Tenev.
But Brewster thinks that, as Robinhood prepares to enter the UK, politicians, regulators, potential users of the app and even parents need to wake up to its potential risks. “It’s very close to gambling in my opinion,” he said. “If you pay attention to how tech uses brain hacks [psychological tricks], you’ll see something much closer to a casino than what I perceive a financial product should be. Users need to understand that Robinhood’s incentives are probably not aligned with their financial success.”
Michael Fletcher, a 25-year-old computer network engineer from Bolton, is one of the 250,000 British people who have signed up to use Robinhood when it makes its UK debut. He feels he has done well in his fledgling investment career by taking a long-term approach, investing in companies he believes in. But he fears others may get in over their heads. “Day traders are often betting on short-term fluctuations that they don’t understand,” he said. “You might as well be putting it all on black on roulette. There should be questions at the start and one of those should be to explain the difference between a trader and an investor, because people don’t understand.”
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