01.21.2016

How Snoop Dogg is helping disrupt the world of fintech (By David Donovan, Sapient Global Markets)

Snoop Dogg has been known to cause disruption occasionally around the world.  He has hit the headlines for numerous reasons, although not many to do with fintech. Until recently.  It seems he is now looking to participate in the disruption of financial markets. He is part of the investor circle that funded the most downloaded app of 2015 according to both Apple and Google: Robinhood.

Robinhood is an app that aims to make trading stocks simple and free. You no longer have to pay commission to trade. Started by two Stanford University roommates, Vlad Tenev and Baiju Bhatt, who worked on Wall Street building high frequency trading platforms before quitting to go West Coast, Robinhood’s mission is “To democratize access to the financial markets.” And Snoop Dogg is just one of many who are taking notice. He is surrounded by a posse of high profile Hollywood/music industry investors—such as Aaron Levie, Nas and Jared Leto— high profile VC firms— NEA, Index Ventures— and Google Ventures, Andreessen Horowitz. To date this fintech firm has raised close to $66 million.

Robinhood looks to follow the same principle of other major industry disruptors (take your pick from Netflix, Uber, Etsy, AirBnB). Those companies serve two purposes,: 1- streamlining a popular product or service by eliminating excessive features and expenses and 2 – catering to the next generation of the DIY-inspired, independent Millennials.

Free is a good start but not a sustainable business model, so how does Robinhood make money? According to their blog:

Robinhood makes money in many of the same ways as traditional online brokerages. These include:

– Collecting interest from customers unused cash deposits and for customers who choose to upgrade to a margin account.  They will charge 3.5 % vs E-Trade 8.44%. We are testing margin in beta and will offer margin accounts later this year.

 – Accruing interest from customers’ unvested cash balances. It is important to note that our customers are not charged.

David Donovan, Sapient Global Markets

David Donovan, Sapient Global Markets

Why should the traditional brokers and advisers care?
It is super critical for brokers and advisers to take note because this is the fight for the customer of tomorrow. This is the fight for the money of the millennials.  A recent study by ICI the fund’s industry trade group showed that only 5% of the $15.9 trillion in the US household’s mutual fund assets are held by millennials. Because of this just 30% of advisers say they actively seek clients under age 40.

Millennials have no qualms about abandoning firms that don’t meet them on their terms. In a survey by LinkedIn and market research firm Ipsos, nearly seven out of 10 millennials said they were open to trying financial products and services from nonfinancial brands (think Apple or Google); only 47% of Gen Xers said the same. These experimenters could get used to a world where lines of code are as helpful as a mahogany-desk adviser.

The new breed of AI-driven managers—most of which are either online platforms like Wealthfront and Betterment or mobile apps like Robinhood and Acorns—offer millennials a way to trade stocks without having to deal with a potentially untrustworthy human intermediary (boomer or otherwise). Their “advice” takes the form of algorithms that suggests allocations based on the user’s responses to survey questions; they also offer on-the-go trading. The platforms are unemotional, subservient, and agenda-less; the polar opposite of many traditional advisers, especially those with commission-based models. The investing startups sell access to a diversified list of inexpensive investments, such as index funds and ETFs, and assure millennials that they can grow their wealth while mitigating risk.

Jan Hammer, a partner at Index Ventures who led the Robinhood investment, told Business Insider: “From the time of our Seed investment in 2013, Robinhood has continued to impress us with the quality of their product and the pace of growth. They’ve not just made trading simpler, mobile and free, but by doing so, they’ve opened up stock trading to a generation of Millennials who have largely stayed clear of the stock market.”

A Lesson from Snoop?

 A number of traditional advisors have been gearing up their partnership models and strategic investments to support the customer of tomorrow and deal with the impending disruption. Established wealth managers, however, are not passive spectators. “If we don’t stay at the top of our game, our industry is ripe for disruption,” says Nicole Sherrod, managing director of the trader group at TD.

So as the financial world continues to evolve with unlikely partners, players and investors, it is a great opportunity for existing establishments to continue to change with the times. Building the right partnership ecosystem and reaching across the traditional financial siloes is a key strength that the firms need to build.

So when Snoop Dogg raps: “You should take a trip and visit the West Coast” maybe he was always inviting the Wall Street firms to go west for their latest partnerships.

David K. Donovan is managing general partner at Sapient Global Markets, where he leads the Global Investment Banking business, managing relationships with the leadership of the top tier global investment banks. He is also part of the leadership team within Sapient Global Markets, responsible for setting operational and business strategies for the firm. David has spent 25 years on Wall Street as an institutional equity trader, including 14 years as the sector leader of technology trading for Fidelity Management and Research.

Related articles

  1. With Eugene Kanevsky, James Redbourn, and Joanna Wong, CLSA

  2. AI/ML on the buy-side trading desk is a long-term program with short- and mid-term deliverables.

  3. Aiden uses the computational power of deep reinforcement learning to improve trading results and insights.

  4. OPINION: Artificial, Yes. Intelligent? Maybe.

    BondDroid’s AI-generated prices are integrated directly into LTX’s pre-trade analytical tools.

  5. Fintech firm has partnered with Jim Toffey, founder of Tradeweb Markets, to create LTX.