Forget Robinhood! Canada’s Version Is Much Better

Robinhood faces public and regulatory pressure. I prefer Wealthsimple — owned by Power Corporation of Canada (TSX:POW).

investment research

Image source: Getty Images

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

The filing had plenty of interesting details that paint a picture of the modern investment 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 stock trading platforms to cut its fees to zero, which helped it gain a foothold with millennial and Gen Z traders. Now, with crypto trading, gamification, and influencer marketing, the company has cemented its position as the prime financial services provider to increasingly wealthy young traders. 

The past year was one of its best. Funded accounts on the platform jumped from 7.2 million to over 18 million. Assets under custody have surged from US$19.2 billion to over $80 billion today. By all accounts, Robinhood is immensely successful. 

However, there’s a dark side to this success.

Robinhood’s pitfalls

The company is undoubtedly one of the most controversial firms in FinTech today. The team recently settled a wrongful death lawsuit filed by the family of a 20-year-old trader who died by suicide after seeing a negative account balance of $730,000. The Financial Industrial Regulatory Authority (FINRA) accused Robinhood of “systemic supervisory failures” and giving customers “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 meme-inspired cryptocurrency, accounts for over 34% of its revenues. 

However, the biggest concern is probably Robinhood’s business model. Since traders don’t pay fees, their trading information is sold to institutional investors and hedge funds who can front-run these retail trades. In other words, the users are the product, and their personal financial decisions are sold to the highest bidder. 

A better alternative

Wealthsimple, Robinhood’s Canadian rival, resolves these issues by adopting a different business model. In Canada, payment for order flow is not permitted, which is why Wealthsimple offers a premium subscription at $3 a month alongside its free trading accounts. 

The company also earns a 1.5% conversion fee on Canadian to U.S. dollar conversions. 

In my view, Wealthsimple’s business model is more user friendly and less prone to lawsuits. I eagerly await its public listing, but if you want to get in early, you could bet on its majority shareholder, Power Corporation of Canada

Power Corp shares trade at a price-to-earnings ratio of 11 and offer a steady 4.5% dividend yield. It owns roughly 89% of Wealthsimple’s outstanding shares, which means an eventual IPO will unlock tremendous value for Power Corp shareholders. Keep an eye on this overlooked opportunity. Bet on Canada!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Dividend Stocks

grow dividends
Dividend Stocks

1 Cheap Stock to Turn a $20,000 TFSA Into $267,000

If you're looking to boost your TFSA, you need a cheap stock that you can hold for decades. And I…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

2 of the Best Monthly Passive-Income Stocks to Buy in Canada Right Now

Here are two of the best Canadian monthly passive income stocks you can consider buying right now to hold for…

Read more »

stock analysis
Dividend Stocks

3 TSX Stocks I Will “Never” Sell

Few companies offer a powerful enough combination of dividends and growth potential to deserve a permanent place in your portfolio.

Read more »

value for money
Dividend Stocks

2 Cheap TSX Stocks for TFSA and RRSP Investors to Buy Now

These stocks look attractive today to buy for a TFSA or RRSP portfolio.

Read more »

Increasing yield
Dividend Stocks

3 TSX Stocks With High Dividend Yields

These three high-yielding dividend stocks would be excellent additions to your portfolio in this volatile environment.

Read more »

Payday ringed on a calendar
Dividend Stocks

New Investors: 3 Top TSX Dividend Stocks That Pay Cash Monthly

Canadian investors looking for monthly dividends have plenty of options on the TSX. Here's three of my favourite stocks for…

Read more »

woman data analyze
Dividend Stocks

These U.S. Stocks Are No-Brainer Additions to Your Portfolio

Buy these two no-brainer U.S. stocks if you want to gain exposure to international stocks in your self-directed portfolio.

Read more »

Value for money
Dividend Stocks

1 Value Stock Every Canadian Investor Should Own

This value stock not only has a solid present, but a stable future at incredibly cheap and even oversold prices!

Read more »