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Robinhood is raising the fee on a key transfer activity by 33%. In an e-mail, the company informed users that the fee to transfer assets from their Robinhood brokerage account to another institution, known as an ACAT transfer, would increase from $75 to $100 starting July 1, 2022. The move comes after the company reported dismal first quarter earnings and announced that it would lay off 9% of its full-time staff.
Robinhood Revenue Declines
While the S&P 500 is down approximately 14% so far this year, Robinhood shares are 44% lower year to date and down over 70% since the company went public last year. In announcing first quarter earnings, the company reported a precipitous decline in revenue, down 43% year over year, and a loss of over one million users. “We face a challenging macro environment, one most of our customers have never experienced in their lifetimes,” Robinhood CEO Vlad Tenev said during an earnings-related call.
While Tenev indicated the company was strong financially, with $6 billion in cash, Robinhood has nonetheless sought to stabilize its financial performance. It has taken actions to lower its operating expenses by laying off 340 of its full-time employees. In addition, it has looked for additional levers to diversify revenue. Robinhood makes “nearly three-quarters of its revenue from transactions, and that revenue stream has been falling steadily since last year as trading activity has cooled.”
Earlier this week, the company announced a new feature that would allow users to lend out their shares and be paid when matched with a borrower. Robinhood would earn revenue by taking a percentage of the fees from each loan.
The increase in transfer out fees represents another avenue to generate more revenue.
Robinhood Increases ACATS Fee
When customers want to move their assets from one brokerage firm to another, one popular method is The Automated Customer Account Transfers Service, known as ACAT or ACATS. The National Securities Clearing Corporation operates ACATS and provides a streamlined method to move to a new broker. The benefit is that “instead of having to liquidate all the securities in your investment account just to reestablish your positions at a different broker, the ACAT transfer makes the entire process automatic, saving you time and money.” This also helps avoid potential tax consequences.
Not all companies charge a fee to transfer money out. Vanguard and Fidelity do not charge fees for full or partial ACAT transfer out transactions. Robinhood currently charges $75 for this transaction. Starting July 1, 2022, it will increase this fee to $100.
Contextualizing Robinhood’s Fee Increase
While a $25 fee increase may not sound like a large change, consider a few data points. First, the change represents a 33% increase in the fee and puts it well above other players. More relevantly, the fee puts a substantial burden on Robinhood’s average user. Paying a $100 ACATS transfer fee would equate to 41% of the median user’s account balance given that the average Robinhood user has a median account balance of $240. The mean account balance of a Robinhood user is substantially higher, but this is skewed by larger accounts. The median is a better measure and indicates that 50% of Robinhood users have an account balance below $240.
Will this fee deter Robinhood users? It may not, but the current downturn may take care of that on it’s own. “The reality is that self-directed investing often feels fun and easy when markets are just going up and up,” says Michael Kitces, head of planning strategy at Buckingham Wealth Partners. “It takes a bear market and the experience of losses for us to start to distinguish between our own luck and skill.”