Freetrade can be on the on-ramp to investing for a new generation
Disclosure: I am an investor in Freetrade
A nation of shopkeepers maybe, but the U.K is not known as a nation of stock-pickers. Only around 4% of the adult population have a stocks and shares ISA¹ . The young especially are under-represented — only 1 in 50 25–34 year olds have a stocks and shares ISA¹:
There is no inherent reason so few young people should be investing and participating in the stock market. What gives?
The traditional investment platforms (Hargreaves Lansdown, AJ Bell, Interactive Investor, Barclays, etc) must be a major part of the story. They have never been an easy place for a newbie investor with modest earnings, a.k.a. nearly every twenty-something / thirty-something.
Pricing is the killer. The traditional model is this: £12 per trade. Now if you’re bringing £20k to the table this isn’t a problem; buy 20 stocks for £1k each and your total fees will be 1.2%. All good. But what newbie investor millennial is turning up with £20k? If you’re new to all this and you have a normal level of income you might be looking to invest around £250, or £1,000 say. You don’t know what you’re doing yet and this is your hard-earned cash.
What happens with £1,000? Well since you’ve done some homework and you know diversification is the first principle of responsible investing, you want to spread your money across 20 stocks (that’s what our wealthy person did). OK go ahead — that’s £50 per stock, and then, wait, £12 charge for each one?! That’s 24% in fees. Your portfolio is going to begin life feeling like its just been hit by a major stock-market crash, and will similarly take years to recover.
With these levels of capital the trade-off between fees and diversification is acute, and the upshot is to make investing either highly risky or completely unprofitable. Young people would be sensible to stay away. Here’s how much initial capital impacts returns in a world of £12 fees:
To put that in context: with £2k total investment, and your portfolio down 12% on day one, it would take around 1 year and 9 months for your portfolio to recover, just to break-even (assuming a long-run FTSE growth rate of 7.75%²).
What all of this really amounts to is another manifestation of that age-old injustice that you have to have money to make money. Effectively there has always been a minimum bar for responsible, direct-to-company, stock market investing in the U.K, and its about £20,000. This rules stock-picking well out of reach for most young people, and is an intimidating bar for anyone new even if they do have the cash.
What an ordinary-income newbie can do perfectly well is invest in mutual funds, which are kind of pooled investment fund widely available in the U.K.. These are very popular (no wonder) because they allow you to invest any amount of money with a fee of 0.5–2%, and you get access to a diversified set of companies managed by a professional manager. This surely is the obvious option for someone starting out? Why would they think they know what they are doing better than a professional fund manager?
Well they don’t, but they still need to pick some funds to put their money into, and there are over 3,500 listed on Hargreaves Lansdown. Which do you pick? How do you split your money across them? How many should you pick? Which are the good ones? This is not easy at all. And in fact its a dreadful place for a newbie to get started because every single fund is completely unfamiliar (Invesco Emerging European (Class Y) anyone?). You will feel immediately lost.
What does it actually feel like to be investing for the first time? When you’re sat there googling ‘ETF’ and ‘stock market crashes’? You know that lots of smart people dedicate their entire lives to investing, and get paid millions for it; you know its complicated and technical and there are so more things you don’t know than you do — it all feels like ‘unknown unknowns’ to you; you probably know that while there are general principles of good investing, there is no exact rulebook you can follow; you know it can be risky, and there’s the real possibility you’ll lose money; you know what happens is mostly beyond your control. This is not an easy environment to take first steps in.
Funds are unhelpful because the make the environment feel unfamiliar. There is a case for saying at the very early stages of investing — the on-ramp — the experience should optimise not for financial return, immediately, but for being engaging. People should be able to relate to it, and start taking steps and actions, and see what happens. Just like any the experience in any new domain. What does it feel like to open the app and see your portfolio down? These are things you can only learn by doing.
Looked at from an engagement perspective, investing into companies directly is completely different than investing in funds. You don’t know what any of these funds are so how do you engage with them? Whereas everyone knows some companies. You don’t need to be an expert to have some general, starting intuition for the prospects of Next (U.K. retail chain) for example. You know the brand, you know that clothes shopping is moving online, you know that its been around a long time, and what your friends think of it, and where it sits in the ‘hierarchy’ of clothing shops. You might have seen a new store open recently (or close). Its ok this doesn’t add up to a financial analyst’s report, it is enough to get you started forming the basis of an opinion, and that is where ‘engagement’ starts.
The ‘professionals’ would fear that this sort of understanding is not sufficient for making investments off of, and they are half right, but it depends how much money you are putting in. If it is just £50 to learn, what is the harm?
So these two elements are the key to the on-ramp: familiarity, and an affordable ‘soft-play area’ for your money, where you can mess up without fear you are doing yourself real financial damage. The latter is why the incumbent pricing model is so inhibiting to newbie investors. The effective minimum bar of £1k per company / £20 total makes every decision incredibly consequential, with disastrous consequences for learning (even if you can afford it).
The incumbent investment platforms then (AJ Bell, Hargreaves Landsown, Barlcays etc) are a woeful place to get started investing. They fail the basic test of any on-ramp to any sort of skill, which is providing a ‘safe’ place to learn, explore, make mistakes and gradually build confidence.
But now all of this is changing, with the recent rise of commission-free share trading apps like Robinhood (USA), Trading 212 (Europe-focussed), Freetrade (U.K.) and eToro (Global). These services allow you to invest in companies directly (and many other things) for no fee, thereby sweeping away the old ‘minimum effective bar’ and providing that ‘soft-play area’ to everyone. And they seem to be popular, with Robinhood surpassing 13m users³ and eToro eyeing an IPO in 2021.
Within this segment Freetrade stands apart in one very important way, which is that it is the only app to focus exclusively on ‘vanilla’ investments. On Freetrade you can buy stocks and ETFs and that is it. There is no forex, gold, commodities, options trading, leverage, CFDs or any other form of exotic, specialist investment instrument. This helps Freetrade with the ‘familiarity’ dimension of the on-ramp; it helps new investors feel — as we saw with hargreaves and funds — that the environment is recognisable and relatable.
So Freetrade, I think it is fair to say, is nothing short of transformational for the young, responsible, would-be investor in the U.K. (and Europe). It opens the practical door to investing for a cohort of people (20s/30s, ordinary-income, interested in responsible investing) who must easily number millions across Europe.
The most impactful thing Freetrade could do culturally in the U.K. would be to normalise the concept of a ‘£100 Portfolio’. Everyone could have one, why not? It’s not going to fund your retirement but it would be your little piece of the global stock market. Its not hard to envisage a world where this would seem totally normal for 20/30 somethings; most of your friends would have one, and you’d discuss how your portfolio was doing when you’re out in the bars, alongside chat of dating, football, jobs. It might even begin to seem like not having one would signal a kind of financial immaturity. It’s a statement of being financial empowered, and expression of your personal opinion on something important and global — the tagline writes itself: “£100 Portfolio: What’s in yours?”.
With Freetrade the shackles are off, just try it. If you put in £100 and buy ten stocks, then change your mind tomorrow, that’s ok, there’s no penalty. If you see a stock your friend has and you want to copy it, that’s ok. Its free. If you wake up one day and your portfolio is down 25%, that’s ok, it’s an amount of money you can afford to lose. The point is you are engaged, you are taking ownership of your investment decisions, and you are learning.
It is too early to tell yet whether this on-ramp can alter the shape of the overall investment market in the U.K. (Freetrade had less than 100k users at the beginning of 2020). But we know where to look: the age distribution of stocks and shares ISAs, the average ISA subscription value (down), the median retail investor age (down), the median share deal value (down), the economic demographics of a typical investors broadening out. All of these would show that the U.K. investment market had become fairer, more diverse and more representative of the population as a whole, and I have little doubt that were that to happen Freetrade would be no small part of the story.
¹ Numbers derived from: https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationprojections/datasets/tablea21principalprojectionukpopulationinagegroups and page 26 of https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/894771/ISA_Statistics_Release_June_2020.pdf
