The Robinhood trading platform yesterday gave potential investors a sneak peek under the hood. The Menlo Park-based company has filed an S-1 with the Securities Exchange Commission (SEC) for an initial public offering.

The brief contained many interesting details that paint a picture of the modern investing landscape. But they also show the pitfalls of this business model, and perhaps highlight why Robinhood’s Canadian rival, Wealthsimple, is a much better bet. Here’s a closer look.

Robinhood’s success

At first glance, Robinhood seems like the perfect investment opportunity. The company was one of the first equity trading platforms to cut its fees to zero, which has helped it gain a foothold with millennials and millennials. Now, through crypto trading , gamification and influencer marketing, the company has solidified its position as the leading provider of financial services to increasingly affluent young traders.

The past year has been one of the best. Accounts funded on the platform grew from $ 7.2 million to over $ 18 million. Assets on deposit have grown from $ 19.2 billion to over $ 80 billion today. Everyone agrees that Robinhood is a huge success.

However, there is a dark side to this success.

Robinhood’s traps

The company is arguably one of the most controversial FinTech companies today. The team recently settled a wrongful death lawsuit filed by the family of a 20-year-old trader who committed suicide after seeing a negative account balance of $ 730,000. The Financial Industry Regulatory Authority (FINRA) has accused Robinhood of “systemic supervisory failures” and of giving clients “false or misleading information”.

Meanwhile, critics argue that Robinhood’s gamification and access to excessive leverage has made young investors less risk averse and more addicted to gambling with stocks. Indeed, the S-1 confirms that Dogecoin, the volatile memes-inspired cryptocurrency, accounts for over 34% of its revenue.

The biggest concern, however, is probably Robinhood’s business model. Since traders pay no fees, their trading information is sold to institutional investors and hedge funds that can handle these retail transactions. In other words, users are the product and their personal financial decisions are sold to the highest bidder.

A better alternative

Robinhood’s Canadian rival Wealthsimple addresses these issues by adopting a different business model. In Canada, payment for order flow is not allowed, which is why Wealthsimple offers a premium subscription for $ 3 per month in addition to its free trading accounts.

The company also charges a 1.5% conversion fee on conversions from Canadian dollars to US dollars.

In my opinion, Wealthsimple’s business model is more user-friendly and less prone to lawsuits. I am looking forward to its IPO, but if you want to join early, you can bet on its majority shareholder, Power Corporation of Canada.

Power Corp shares trade at a price / earnings ratio of 11 and offer a stable dividend yield of 4.5%. She owns approximately 89% of the outstanding shares of Wealthsimple, which means that a possible IPO will unlock considerable value for Power Corp shareholders. Keep an eye out for this overlooked opportunity. Bet on Canada!

The Forget Robinhood! The Canadian version is Much Better first appeared on The Motley Fool Canada.

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The Motley Fool has no position in any of the stocks mentioned. Foolish contributor Vishesh Raisinghani has no position on the stocks mentioned.


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