The overlooked trade-offs in commission-free trading apps

The overlooked trade-offs in commission-free trading apps

The overlooked trade-offs in commission-free trading apps

As competition in the investing world drives management fees down to zero, a similar story is developing on the trading-platform front. In one of the world’s key financial markets, app-based services are offering users the chance to deal in stocks, shares, and other listed investments — for nothing.

“A new breed of fintech upstarts has thrown down the gauntlet to the giants of the UK investment platform market,” reported the Financial Times. Courting clients with smaller accounts, app-based services are offering free trading options and claiming that larger established firms are adding hundreds of pounds of unnecessary fees to investors’ bills each year.

Such tech-savvy financial companies are looking to embrace young investors by offering to let the trade stocks, shares, and investment trusts, along with a host of overseas investments. “[W]e wanted to make sure someone just starting out in investing could sign up for an account and build a diversified portfolio without having to worry about paying fees,” Adam Dodds, founder of Freetrade, told the Times.

Freetrade users have the chance to pay by agreeing to have their trades conducted in bulk with all other customers at 4 PM each day. Beyond that, Freetrade follows a so-called “freemium model,” which lets customers use certain services for free or pay a monthly subscription for a premium account. The company claims that around 50% of its members want to join its premium tier, which it plans to launch later this year for an all-in cost of about £7 a month.

Another app-based service, Revolut, allows customers to select one of three subscriptions: standard (free), premium (£6.99 a month), and metal (£12.99 a month). Each option allows a different number of free trades per month.

Commission-free trading can seem very appealing in comparison to incumbent platforms’ pricing, though shopping can be hard as platforms vary charges based on the type of investment and frequency of trading. Hargreaves, the UK’s largest fund platform, charges £11.95 each time investors trade UK shares, ETFs, and other listed investments; that goes down to £5.95 per trade for those who have dealt 20 times or more in the previous month. Another player, AJ Bell, charges £9.95 for most share deals and cuts it to £4.95 per trade for customers who made 10 deals in the previous month.

These can add up to hundreds of pounds in dealing fees alone, which can matter significantly to small investors. In defense, the incumbent DIY platforms say they must pay fees to third parties such as stock exchanges and market makers, and that fostering such relationships brings better outcomes for investors such as better prices than those quoted on major exchanges.

“Bulk trading is very different from our price improvement service, which polls up to 30 different market makers to get the best price for share deals,” Hargreaves said.

Executing trades in bulk at the end of the day cuts costs for free trading apps, but it also means that investors may miss out on the best price. Free-trading services also currently offer users far fewer resources, a much smaller range of investments, and a more limited range of tax-efficient wrappers compared to traditional platforms. And while the services are gaining traction among younger investors, the nascent businesses face significant operational costs and are counting on a huge buildup of signups down the road to break even.

 

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