How Freetrade could give everyone a financial adviser

Disclosure: I am an investor in Freetrade

The millennial market is existential
I’ve argued elsewhere that if Freetrade is to become a major player in the U.K., it will need to dominate the millennial demographic. This is a tall order against formidable incumbents such as Hargreaves Lansdown. The secret, I believe, is to build new product experiences that qualify as ‘Millennial Wow’, that is — 1) woven tightly throughout the existing product and pricing; 2) very difficult to execute on; 3) solving the unique and particular needs of millennials; and 4) offering some value that is unattainable elsewhere.

An NCT class for your financial life
Here is one such big idea: Freetrade should build out a financial advisory service. A new business-within-a-business that offers a way for millennials to access interactive, hands-on, high-quality financial advice. There is nothing remotely like this in the marketplace today, but the opportunity has been suddenly opened up by the shift online brought about by Covid.

How would this work? The core would be a shift from 1:1 advice towards a new kind of private, virtual, seminar-style class, with around 10–25 attendees. Hosted by an IFA and based around a particular topic, the essence of this new format would be interactivity — asking questions, live discussions and candid advice (Hopin would be the obvious candidate to host).

In a perfect world everyone would have their own advisor, but this is out of reach for all but the wealthiest millennials. The next best thing is a small group format — think of it like an NCT class for your financial life. This shift in format enables a >10x drop in the costs, opening up financial advice to a vast new audience for the first time.

Hyper-relevancy. Backed by Trust
There is tonnes of financial advice available freely on the internet, why would anyone care about this service? The answer is hyper-relevancy. Classes have to offer expert guidance on complex topics that are too niche to be properly covered elsewhere.

For example:

  • Tax optimisation for people earning over £100k
  • Saving for your child (0–5): JISAs, saving for university
  • Getting started with Crypto Currency in the U.K. — tax implications, platforms, bank transfers, storage.
  • Portfolio design when saving for house in the next 5–10 years
  • Buying a property at auction in London
  • Managing your own SIPP: 101 introductory class
  • Making your first investment in the stock market (3-part series)
  • Salary negotiation at work for Women
  • Negotiating equity at tech start-ups in the U.K.
  • Becoming a landlord — should I sell my flat or rent it?
  • Introduction to the EIS, SEIS and VCT tax-advantaged venture capital schemes

These classes should stand-out so much that you are surprised they even exist at first — who knew I could get advice on something so relevant to just what I was thinking about?!

Hyper-relevancy demands a vast breadth of content to ensure that everyone can find something that they’re interested in. Which brings us to IFAs….

Cost control
The (unvalidated) assumption behind the business model is that there are a substantial number of (probably younger) IFAs in the U.K. who are looking to establish themselves and grow their future client pipeline; they are in growth mode.

How does a young IFA start building his/her own client base from scratch? They cannot promote their services due to regulation, there is no marketplace to gain reach. How do they establish credibility and trust? How do they convince people, especially millennials, that their advice is worth paying for?

So Freetrade could offer something unique to IFAs: a chance to get in front of potential clients, in person (virtually), and show they know what they’re talking about; coupled with the credibility conferred by being on the Freetrade financial advice platform. In other words distribution — Freetrade gets IFAs distribution.

The hope would be that this is enough for IFAs to run seminars at a pretty low cost (as a loss-leader), which enables Freetrade to make the pricing low, thereby creating a uniquely accessible form of financial advice.

Nothing in life is free
There should be a ticket price for attending a seminar, for two reasons:

1. This allows the Plus tier to offer free sessions, substantially boosting the appeal of this tier
2. For the audience to represent a valuable potential pipeline for IFAs, they would want the attendees to be onboard with the idea of paying for financial advice, even if in only small amounts. This is a form of very light ‘qualification’, which is necessary to ensure IFAs ultimately get value from the platform.

Ideally ticket prices would be something like:

  • Plus: Free
  • Other plans: £7
  • Non Freetrade users: £12

Freetrade should not look to make any money from this in the early years, if anything it should be run as a loss-leader. This ensures that costs are kept low, enticing more people to use the service, and thereby powering a flywheel that over time could become a hugely valuable strategic asset to Freetrade.

The flywheel
Flywheels can drive businesses to stratospheric success when done right — just look at Amazon. The essence of flywheels is that they are hard to get going, requiring substantial upfront investment, but once they get spinning and acquire a momentum of their own they propel the business unit forward at an ever-increasing rate, generating more and more value and creating a moat that is ever-harder for competitors to bridge. This dynamic could create huge strategic value for Freetrade.

This financial advice business has strong flywheel dynamics because of how central hyper-relevancy of classes are to the product’s success. As a user I need to be seeing 2–4 really interesting (‘sign me up!’) classes every month — and that means niche classes, like ‘Negotiating equity at tech start-ups in the U.K.’ and huge breadth.

But an IFA is not going to run a class on ‘Negotiating equity at tech start-ups in the U.K.’ if they expect only one attendee. The class needs to be near-full (and ideally full each time they re-run it). Since this class is clearly not relevant to most people, there needs to be hundreds of thousands of engaged users on the platform to ensure 10–20 actually show up for the class. But why would hundreds of thousands of users be on the platform if there are no interesting classes available for them?

That is the catch-22 that needs to be broken to get the flywheel spinning; what looks like a impossible hurdle is the precisely the challenge of starting a heavy flywheel. The harder it is to start, though, the more powerful it is when it gets going: as more users join the platform, more IFAs want to join, this increases seminar depth and frequency, which brings more users onto the platform. Now the dynamic is working to your advantage, driving a customer experience that gets better and better every year, and harder and harder for rivals to emulate.

It’s a hard flywheel to start but Freetrade have a unique set of resources that would give them a fighting chance of actually getting it spinning:

  • Over 500,00 users, mostly in their 20s and 30s
  • A brand that is squarely millennial in focus, allowing them to leverage the entire company’s brand weight behind the initiative (contra Hargreaves)
  • A brand that supports unabashedly mainstream, long-term investing, eschewing exotic instruments such as CFDs and options trading (contra eToro, Trading 212, Robinhood etc). This provides the brand ‘cover’ needed for users and IFAs to perceive the initiate as trustworthy, credible and genuine.
  • The ability to apply large amounts of capital (the next raise is likely to be £50m+) to the initiative.
  • A ’silicon valley’ product mindset, that can help ensure the product is executed to a very high-standard and is maximally attractive to users.
  • An user-base who, by virtue of using a DIY retail investment platform, are likely to have more wealth than the average younger person (critical to the IFA pipeline) and are more likely to be interested in self-learning around financial matters.

What’s in it for Freetrade?
Coming back to the start: for Freetrade, the battle to win the hearts, minds and savings of millennial investors vs Hargreaves Lansdown is existential to their becoming a major player in the U.K..

This initiative could be of enormous strategic value to Freetrade for the simple reason that it would propel millennials into their arms, while at the same time becoming increasingly difficult for rivals to imitate.

The flywheel effect creates a defensible moat, and Freetrade have the added advantage that by baking it into the pricing tiers it would be particularly hard for Hargreaves Lansdown to copy — while they can always lower prices, they cannot easily replicate a ‘package’ that bundles heterogeneous offerings (share trading and financial advice) because their customer base skews much older and therefore has very different financial advice needs.

Referring back the ‘Millennial Wow’ framework, this product scores pretty highly:

  • Woven throughout the product — 3/5. It is not tightly integrated into the product itself, but it would be into the pricing tiers.
  • Hard to build out — 4/5. Pretty hard to execute all round because it requires building a deep, two-sided marketplace from scratch.
  • Unique value — 5/5. There is really nothing like this at all out there at the moment
  • Millennial focussed — 3/5. There is a huge deficit of financial advice and knowledge amongst younger people, and millennials are known for being happy with DIY learning.
  • Overall — 15/20

Beyond all this there are several ancillary benefits that could accrue to Freetrade:

  • Trust in the Freetrade brand and platform — by associating itself so deeply with long-term, responsible financial well-being, Freetrade would burnish its reputation as a ‘mainstream’ investment platform and help convince people it is a safe place to keep their money.
  • Driver of Plus subscriptions — For Freetrade to be a thriving business in the long run the Plus package really has to be widely taken up. Adding this major new feature would substantially increase the attractiveness of the top-tier membership plan.
  • Top of funnel marketing — the class schedule provides a great marketing tool for increasing awareness of Freetrade. The schedule should be publically available, searchable and shareable, providing a ‘hook’ to get new people noticing the company, and a regular drumbeat of content that can prompt word of mouth sharing (e.g. sending a friend a class that is relevant to them).

Conclusion
Up until now, financial advice has really only had two modalities: mass-market broadcast (e.g. blogs, websites or books) and 1:1 consultations (with a trained professional).

Broadcast is well-suited to answering simple financial questions (like is an ISA a good idea, and how much is the allowance this year?), but is poorly suited to more complex questions, like what % of my ISA should I put in stocks and shares vs cash? That latter question is extremely difficult to answer, requiring a deep understanding of personal circumstances, risk tolerance, stock markets and more. There is no simple or generic answer to that question, making it is ill-suited to broadcast format, where advice is inevitably de-fanged and struggles to convey nuance.

The upshot is that most people basically have to teach themselves financial advice, piecing together knowledge from here and there, trying things themselves and gradually building competence. It is DIY or nothing really, and many people, lacking the natural inclination or interest, or simply wary of making a mistake that could cost them dearly, are over-likely to just opt for nothing.

But something huge has changed over the past year. The way we interact has been transformed by the pandemic; Zoom is the new normal, and we are all now more than familiar with a ‘virtual by default’ world. Conferences and seminars have moved online, exploding the addressable audience for live events by many orders of magnitude. The profound effect of this will be to enable niche timetabling to flourish in a way that it simply couldn’t before. (If you thought comicon was eccentric, wait until you see what Hopin throws up).

And it is this dynamic that makes a financial advice network viable now in a way it wasn’t just a year ago. The critical driver of success is the depth of the marketplace — IFAs and attendees. With virtual classes now normalised, the potential attendee pool has increased 100x, providing the depth needed to make the proposition viable.

Freetrade has a unique opportunity right now to leverage its natural strengths, coupled with this tectonic shift online, to build a unique, compelling, valuable and powerful new modality for financial advice. In so doing it could jolt its (already favourable) prospects onto an even steeper trajectory, and provide more fuel to the fire on it’s mission to ‘get everyone investing’.

Data scientist, product junkie, one-time founder. London-based. @tgh44