Why the public is still leery of online brokerages

The more than 10 million new brokerage accounts opened last year flooded retail investors into equity markets — but it also exposed cracks in online platforms in the process.

After the GameStop trading melee in January and February, lawsuits have popped up alleging wide-reaching conspiracies and gamification strategies at some of the most well-known brokerages, creating new riffs between online platforms and their clients. 

After years of struggling to rebuild the reputational harm caused by the likes of Bernie Madoff and others, bad actors have left the financial advice industry dealing with a sometimes unsavory public perception. While the majority of retail investors believe financial advisers are required by law to act in their best interest, only 35% of investors said their advisers actually do, according to a CFA Institute survey published last year. 

As more and more investors turn to investing apps, online brokerages are increasingly responsible for building trust and bridging the gap with the investing public. 

Instead, digital platforms have found novel ways of monetizing clients that are often viewed as dishonest, like the use of payment for order flow that lets firms turn a profit by routing trades to the highest bidder. Robinhood Financial, a free-trading app favored by millennials, raked in $331 million in payment for order flow in the first quarter of 2021, according to Bloomberg.

Other brokerages found themselves in the crosshairs as well, especially after the GameStop stock frenzy garnered scrutiny from lawmakers. Lawsuits have alleged an “overarching conspiracy” to prevent the market from freely operating to help Wall Street firms from “hemorrhaging losses.” Defendants include almost every broker that halted trades and others, including Morgan Stanley, ETrade Financial Corp. and Charles Schwab Co. 

Legal experts have said the lawsuits face tall legal hurdles, but that level of distrust is not a welcome sight for the industry. 

The fact remains that online trading apps are Goliath financial services firms that have market capitalizations well into the billions of dollars. While commission-free brokerages have democratized financial services and opened up the markets to the masses, they also have to turn a profit. Unfortunately, those financial obligations don’t always line up with what’s best for clients, and we can’t expect shareholders to turn down profits for the sake of investor protection.

To be fair, the retail brokerage platforms are making significant changes. Robinhood announced it was dropping the notorious confetti in its app architecture and has been steadily ramping up its financial adviser recruiting, according to InvestmentNews’ Advisers on the Move data, to help clients with investment questions. While the adviser recruits will not provide financial advice, they will help with customer service and get investors the information they need. Those are solid strides and will help better inform retail investors.

As the new talismans of the industry the onus is on digital-first platforms to step up and help mend the trust gap between financial advice firms and Main Street investors. Dropping the confetti was a symbolic first step, but online platforms still have their work cut out for them.

The post Why the public is still leery of online brokerages appeared first on InvestmentNews.

As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.

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