Robinhood considers offering US retirement accounts

Trading app looks at tapping into a vast market worth $12.6tn to attract long-term investors, chief executive says

Robinhood has about 18 million funded investment accounts on its platform, most of which are held by retail traders. Reuters

Robinhood Markets is considering launching US retirement accounts, chief executive and co-founder Vlad Tenev said in an online seminar with users of its trading app looking to participate in its initial public offering, which is set to price next week.

The online broker has about 18 million funded investment accounts on its platform, most of which are held by retail traders.

Offering individual retirement accounts, or IRAs, and Roth IRAs, which offer tax advantages to those saving for retirement, would allow Robinhood to tap a vast market.

Americans held $12.6 trillion in IRAs at the end of March, up 2.8 per cent from the end of December, according to the Investment Company Institute.

"We are interested in building more account types, including IRAs and Roth IRAs; we have been hearing that a lot from our customers. We want to make first-time investors [become] long-term investors," said Mr Tenev, in response to an investor question during the online seminar on Saturday.

Due to the penalties involved in withdrawing money, IRAs tend to attract long-term investments, rather than the quick flip in stocks, options and cryptocurrencies that some investors turn to Robinhood for.

"We see evidence that the majority of our customers are primarily buy and hold," said Mr Tenev.

Robinhood, which is seeking a valuation of up to $35 billion in its IPO, has said it will allocate 20 per cent to 35 per cent of shares offered to its users, an unusual move for a high-profile offering.

One of the reasons many IPOs enjoy a first-day trading pop is because the retail investors that Robinhood has invited are excluded and must buy shares in the open market.

Robinhood unveiled its IPO Access platform earlier this year to enable users to buy into the IPOs of other companies if it can negotiate deals with the investment banks handling them.

Some individual investors are calling for a boycott of Robinhood's IPO on Reddit and other social media platforms over its handling of the "meme" stock-trading frenzy in January.

Robinhood placed restrictions on buying GameStop and other stocks that hedge funds had bet against, on grounds that the move was needed for the financial and operational stability of its platform.

It had invested in the stability of its platform to avoid another such incident, Mr Tenev said during the meeting.

Robinhood's popularity has grown over the past 18 months as a result of coronavirus-induced social restrictions that have kept many retail investors at home.

It has said its mission is to "democratise finance for all" by allowing users to make unlimited commission-free trades in stocks, exchange-traded funds, options and cryptocurrencies.

The broker has been criticised for relying on "payment for order flow" for most of its revenue, under which it receives fees from market makers for routing trades to them. However, it does not charge users for individual trades.

Critics argue the practice, which is used by many other brokers, creates a conflict of interest on the grounds that it incentivises brokers to send orders to whoever pays the higher fees.

Robinhood contends that it routes trades based on what is cheapest for its users, and that charging a commission would be more expensive. Chief financial officer Jason Warnick has left the door open for the company to change the practice if necessary.

"If a ban or other limitations on it were to be imposed, we believe Robinhood and the industry would adapt and explore other revenue sources," said Mr Warnick.

Robinhood was founded in 2013 by Stanford University roommates Mr Tenev and Baiju Bhatt, who will hold about two thirds of the voting power after the offering, a filing with the stock exchange showed.

Robinhood customer Minjie Xu, who works as a software engineer in Missouri, remained unimpressed after the presentation amid concerns that the offering is overpriced.

"This is not unique to them, as I think most IPOs are overpriced," Mr Xu said.