Introducing Freetrade’s pricing model
How we align with our customers
With the app in the App Store, it’s time to premiere another key element of our business. After many hours of thought, debate and number-crunching, I’m proud to unveil Freetrade’s pricing model.
As you know, we started Freetrade because the incumbents have made investing inaccessible through artificial barriers like minimum account sizes, high trading commissions and overly complicated products.
This isn’t (just) because brokers are greedy, it’s also because their business models were built for an analogue world and never really adjusted to a paperless, digital world.
We believe that in 2018 a basic investment service, which is based on automated electronic transactions, should be free and accessible to all.
But Freetrade is a business, and we do need to make money to sustain ourselves and keep transforming the industry over the long term.
So when designing our business we started with one fundamental principle: our revenue model has to align with our customers. We only succeed when our customers succeed.
That might seem pretty natural, but it’s actually the opposite of how many incumbents build their businesses. The financial industry is one of very few where the biggest, most respectable players design zero sum business models based around exploiting their customers.
Traditional stockbrokers want their clients to trade as often as possible so they can collect expensive commissions, over and over again. Some also want to push their customers into pricy investment products, like actively managed mutual funds, where they get a slice of management fees that are nothing short of highway robbery.
Let’s talk about the commission issue first.
Probably the most assured way to have an underperforming portfolio, regardless of your investment choices, is trading too much AKA portfolio churn.
Portfolio churn is bad because it means you pay a steady stream of commissions for the same expected investment return as a buy and hold strategy. It also leads to trying to time the market in the short term, which is exceptionally hard to do. Most day traders lose money. CFD and spread betting customers do even worse.
By eliminating commissions, we give people a free hand to change their minds and adapt to new ideas, without niggling costs. But we also risk incentivising our customers to trade more often than is healthy for their portfolio.
We recognise this.
That’s why while our basic service is completely free, there are limitations. Free basic trades are executed near the end of the day, once a day. No risk of day trading here.
But we do think our customers should have the freedom to trade how and when they want, so for an extra £1 you can opt for an instant trade and have it executed immediately (of course, during market hours).
We think that’s important flexibility for our customers to have. But we also didn’t feel comfortable with it being the core of our revenue model. We don’t want to be incentivised to encourage our customers to use the Instant Service as much as possible.
Enter Alpha
Our solution is a premium investment account that aligns our commercial incentives as a business with the best interest of our customers. Freetrade Alpha wraps up all our services in a fixed monthly subscription. For £10 per month, or £100 per year, Alpha customers will get trading/execution, tax-wrapped accounts (eg ISAs), custody and administration of their investments all included.
With an Alpha account, instant trades will be totally free for US stocks and only 50p/trade for UK stocks. We’re also working to drive down and eliminate that UK stocks charge altogether. Basic trading will, of course, always be free for all equities.
We’ll continue to build and add features to Alpha that help our customers make better investment decisions leading to better investment outcomes.
Our aim is to make Alpha so overwhelmingly good that it feels like a way better deal than our free basic service.
The elegance of this model is that it incentivises us to get as many of our customers as possible to upgrade to Alpha and then trade as they want.
Perhaps they top up their ETF allocations at the end of the month, rebalance their portfolio at the end of the quarter, or place a conviction bet on a company they believe in.
The point is our customers make investment decisions undistorted by transaction fees, and we have a sustainable business at the same time.
Freetrade will never measure its success based on how often customers trade. In fact, we will do the opposite.
We will provide insights and analytics to help our customers.
If someone’s portfolio is underperforming their benchmark we could help them understand why, or help them in building a diversified portfolio, or let them put their portfolio on Autopilot and make our algorithms do the heavy lifting.
Our incentive is to build an amazing product, which our customers love so much that they’re happy to pay a modest monthly subscription. Goodbye zero sum, hello win-win.
We’ll be releasing and improving Alpha in the coming months — as always, we can’t wait to hear your feedback in our community board. 🔥
We’re on a mission to bring fee-free investing to Europe and beyond. 🔥
Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.
Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).
