A well-known pundit once said of English football, “you can’t win anything with kids.” He turned out to be wrong: In 1996, Manchester United won two trophies with six players under the age of 23. But for a period, it was deemed accepted wisdom.
The same is said of financial services. Firms have historically shunned younger customers, focusing their marketing on older prospects who are typically more affluent and offer greater revenue potential. Wealth-management firms in particular have long taken the view that it’s better to attract new customers once they’ve made money rather than sink too much cost into going too early.
Then along came Robinhood Markets Inc. “Our customers are the next generation of investors,” the company said at its first investor day last week. Since launching its trading app 10 years ago, Robinhood has focused on wooing those who haven’t traditionally had brokerage accounts. Today, three quarters of its 25 million customers are aged 43 or below, including a quarter who, at 27 or younger, are members of Gen Z. The median Robinhood customer is 35.
In revenue terms, the consensus view holds up. Last quarter, Robinhood generated just US$105 of annualized revenue per user. That compares with US$542 at Charles Schwab Corp, where the average client age is “under 50.” Lower costs support its model. Around 90% of Robinhood’s expenses are fixed, and incremental margins are over 70%, so as the business scales, profitability should follow. Sure enough, the company has now strung together four quarters of net income for the first time in its history.
In addition, Robinhood customers are getting wealthier. Average assets held on the Robinhood platform have increased to US$6,500 per account, from US$4,500 at the time of the company’s initial public offering in 2021. Buoyant markets have helped, but users are also transferring in deposits at a consistent pace. The firm now has 321,000 customers with over US$100,000 in assets, up from 85,000 in 2022. (Schwab customers own an average of about US$275,000 in assets.)
Robinhood’s ultimate payoff, though, will come when its customers’ elders go the way of all things. The company estimates that over the next two decades, $84 trillion of assets owned by older generations will be inherited by younger generations, the largest transfer of wealth in history. It plans to be ready for when that happens. “Since Robinhood has more millennial and Gen Z active users than the other top brokerages, we're uniquely positioned at the epicentre of this massive cultural and financial shift,” co-founder and Chief Executive Officer Vladimir Tenev told investors last week.
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Some incumbent firms have made big strategic efforts to address the shift. “A lot of people used to think about the American Express card and – would our customer base die?” reflected American Express Co CEO Stephen Squeri last year. He resolved the issue by going after younger customers directly, last year acquiring 60% of new account holders from Millennial and Gen Z generations. Although they spend around 20% less than older cohorts, their greater longevity means their lifetime value to the firm can be up to two times higher.
For others, though, the challenge remains. Morgan Stanley’s advisor-led clients are on average 60 years old. According to the latest Fidelity RIA benchmarking study, for the industry overall, the average client age is 58, but weighted by assets under management the average nudges up to 61; weighted by revenue, it hits 65. Some advisory assets will stick around through intergenerational transfer, but not all. “Every adviser will tell you that as soon as that wealth gets passed to that generation, do you know what they do? They fire that adviser — 70% of them get fired,” Steve Quirk, Robinhood’s chief brokerage officer, said at the investor day.
Robinhood isn’t going after advisor-led assets, but its 10-year plan is predicated on its core Millennial and Gen Z clients getting richer and managing more of their burgeoning wealth on its platform. The company generated just US$2.4 billion of revenue in the past 12 months, but with a higher share of wallet from the next generation, it estimates there’s a US$180 billion opportunity to play for.
