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Investments in the palm of your hand

A new, disruptive app is letting novice investors access the stock market. Freetrade co-founders Adam Dodds and Andre Mohamed tell Rohan Banerjee about a future without broker fees.

The stock market, according to Adam Dodds, needn’t be scary – “but people are always afraid of what they don’t understand.” The fresh-faced 30-year-old has a contagious buzz about him as he describes the app he hopes will “democratise” the UK’s investment scene.

Alongside partners Davide Fioranelli and Andre Mohamed, Dodds co-founded Freetrade –a mobile-based stockbroker service offering zero-commission on global transactions. Set to be launched this year and available on iOS and Android, Freetrade has raised a total of £1.3m in less than 10 months through crowd-funding platform Crowdcube.

So, what’s the catch? “There’s no catch,” Dodds laughs, while gesturing towards a sofa sunk so low into the ground that it may as well not be there. We’re at a tech exhibition event in Old Street, London, showcasing successful start-ups. There’s a pop-up bar with a craft beer you won’t have heard of and an even rarer coffee. We fall together before Dodds rebalances himself and explains how Freetrade took off.

The former KPMG accountant, who’s dressed more like a student than a CEO, begins: “When I moved to London a few years ago I was shocked at how expensive and intimidating it was to become an investor. This is why Freetrade was created, to make investing in the stock market easy and affordable for everyone.”

Dodds says many people in the UK, especially millennials, are put off stocks and shares. “Costly broker fees, typically around £12 per transaction, stop smaller investors, who usually need to see their investment grow considerably before it returns a profit.” In addition to the fees, receiving the correct advice is difficult to come by because it tends to require an investor meeting with an independent financial adviser (IFA), which also incurs a charge and is time-consuming.

A report, Bridging the Equity Divide, published by Syndicate Room earlier this year, found that 46 per cent of Britons would love to invest in stocks and shares but don’t know how. Dodds appends: “Even when an investor is knowledgeable, a lot of the traditional channels are out-dated and difficult to use.” Other platforms such as Robinhood and Loyal3 both operate similar zero-commission models in the United States, but cross-pond emigrant Dodds was surprised that UK traders didn’t have anything similar on offer.

Freetrade’s zero-commission tagline, however, should be taken with a pinch of salt. Basic Freetrade accounts are totally free, but premium share-dealing accounts come with a flat rate of £1 commission per £1,000 invested. Another rung sees users charged for self-invested personal pensions (SIPPs) or stocks and shares Individual Savings Accounts (ISAs).

Still, Dodds maintains that there’s nothing cheaper. “Basically, broker fees have stopped smaller investors from making money. The app will remove major barriers to stock market investing. There isn’t anything else like it in the UK.”

Blazer-but-no-tie sort of guy Mohamed grabs a coffee, joins us, and pitches in: “The investment market has been inaccessible, not only due to the outrageous commissions, but the process hasn’t really been streamlined through an app. It’s long, drawn out and you’re signing stuff over with a pen. We don’t have a minimum deposit and users can get started with a few taps of their phone.”

If Freetrade’s costs are so low, where do you make money? Mohamed counters: “You could say the same thing about Spotify. I’m not worried about our premium services not being good enough to cover the revenue. What we have at the moment is a hypothesis and we’re right to find the right mix of premium services and product points. It’s about customer acquisition and keeping eyeballs on the app. It’s very sticky compared to something like Revolut.” Revolut, for context, is a global money app that includes a debit card, currency exchange and peer-to-peer payments. Mohamed goes on: “They have half a million customers but people only use them when they go on holiday. We feel we are in a much better position compared to someone like Revolut when it comes to monetising people’s interest. How we make money is similar to any broker – interests on cash balances. If you haven’t invested fully on your account, there’s revenue that’ll be there for us.”

Whereas other brokers charge a huge mark-up, Dodds says that Freetrade’s effective use of fintech has “totally slashed overheads” and by “not employing hundreds of staff or using bricks and mortar” it retains wiggle room. Mohamed adds: “There are no maximum or minimum trades and there are even fractional trades on offer too. They are real shares and this is real ownership. It’s the same as you would get from another broker but without the hassle or the expense. It’s nothing like CFD [contracts for difference].”

What are fractional trades? Dodds beams: “Freetrade will be introducing fractional share-dealing to the UK market. So, if you have Apple trading at £100 per share, you’ll be able to buy part of that and invest just £25.” Fractional trading is available in the US through the likes of DriveWealth and Stash Invest, but Freetrade will be bringing this model to Europe for the first time.

Is this gambling? Dodds takes a deep breath. “I think there’s risk attached to any kind of stock trading, but this isn’t spread betting. We’re about supporting investors in the long-term who would be excluded otherwise. Users have control and visibility. If you have extra cash and you have it in a bank account, not generating much interest, you could instead have it in an ETF [exchange-traded fund] and it’ll earn money on its own.”

Dodds makes it all sound so easy but he insists: “that’s because it is.” The Freetrade app, “which takes seconds to install”, could be likened to “Uber and Airbnb”. Independent advisers will also be able to provide advice directly through the app, opening up a whole new world to the novice investor. Climbing out of the sofa sinkhole with a smile, Dodds closes with this: “Freetrade is digital only and mobile first, built from the ground up using new technology. This means we have significantly lower staff requirements, so can actually afford to remove commissions from the equation. We’ve seen a similar model work with UK challenger banks like Monzo and Tandem. Now it’s time for the brokers to get disrupted.”

Rohan Banerjee is a Special Projects Writer at the New Statesman. He co-hosts the No Country For Brown Men podcast.

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Pension reform in the aftermath of Brexit should not be a race to the bottom

Left and right need to bury their differences and work together for the benefit of all pensioners, now and in the future, says Angus Hanton

It cannot be said that the current pension settlement in the private sector is intergenerationally fair. Retired workers’ “gold-plated” final salary pensions are receiving contributions that are 20 times more expensive than those for younger staff, and are ruinously expensive in the light of ageing populations and low returns on investment.

That so many older people on final salary pensions also chose Brexit – in spite of expert warnings of the turmoil it would cause to the financial markets, leading to massive losses for the pension schemes’ investments – just makes the case for intergenerationally fair pension reform that much more pressing.

With hindsight it’s easy to identify the reasons why the gap between older and younger workers’ pensions has widened so sharply. Increases in longevity mean companies are having to pay final salary pensions (also known as defined benefit (DB) pensions) for much longer; the pension promises made were too generous; employees did not contribute enough; government tinkering, pension scheme holidays, high management charges, the new normal of low interest rates, poor pension scheme investment returns, and past government tax raids – these have all played a part.

The harder issue is how best to level the playing field in the fairest way for all generations. The current cross-party parliamentary inquiry led by Labour MP Frank Field is, therefore, much welcomed by those of us seeking a fairer settlement between the generations. It is an opportunity to draft a new social contract that is fairer on younger generations, who are left out of the debate even though they will end up footing most of the bill.

All too often the debate is hijacked by the political rhetoric of the left or right. Any attempt to start a debate on intergenerational pension reform with many on the left is met with howls of protest, and accusations of stoking intergenerational conflict that will result in a race to the bottom for all pensions. But the argument of the political left is undermined by the “we’re alright Jack” final salary pension recipients, who have made it over the drawbridge and are sitting pretty on their index-linked final salary pensions.

Meanwhile those to the right of centre baulk at the cost for companies of running expensive final salary pension schemes, and view them as an unfair burden on business. As one finance director said when surveyed on final salary pensions, “We do not have a defined-benefit scheme. God help any company that does.” This is because the sums involved are very large indeed.

In 2015 alone companies spent £120bn covering the shortfalls in their pension scheme liabilities. According to pension analysts, BT will need to take £1bn out of the business each year until 2030 in order to redress its pension liability.

However the die is cast, the losers are invariably the young, left having to contribute more and take less – if they are lucky enough to have access to a company pension scheme – while also paying for the final salary pensions of older colleagues through lower pay, insecure employment conditions and lack of investment or expansion in the businesses they work for.

It’s also far too easy to blame the bankers and corporate tax-dodgers for the intergenerational inequity in pensions. Governments, both left and right-leaning, have failed to protect younger workers.

Where are the quality jobs offering access to in-work benefits and pensions? Governments have overseen a move towards the casualisation of the labour market, with the result that younger generations, loaded down with graduate debt and high housing and living costs, now find themselves increasingly underemployed in precarious jobs. Locked out of company pension schemes, they have also lost out on valuable pre-tax company pension contributions that help to build up a pension nest egg for the future.

This in no way excuses corporate greed. Corporate social responsibility has a part to play in balancing the interests of different generations in the workforce. Younger workers deserve the same access to pension saving as their older colleagues and should also be able to reap the rewards of their employer’s success through pension contributions. However younger workers have already taken a pensions hit in order to make pensions more affordable in the long term by moving to career-average pensions and retiring later.

Government too has worked to encourage greater pension saving among the young with the implementation of auto-enrolment in large- and mediumsized businesses. Getting the young saving is to be applauded but, unless contribution levels by both employers and employees rise substantially, young people today will be the impoverished old of tomorrow. As long as funding past pension scheme liabilities trumps contributions to today’s employees, little reform can be achieved.

It therefore seems only fair that the over-generous pensions in payment to older generations be reformed. Of course, older workers should be entitled to some financial gain from a pension they have paid into for years. They too should reap the rewards from their employer’s success. But, as the turmoil surrounding the collapse of BHS (pension deficit £571m) and inability to sell Tata Steel (pension deficit £770m) reveal, finding buyers willing to take on final salary pension scheme “entitlements” is like trying to re-float the Titanic; there may be simply too much risk of further increases in life expectancies to make salvage an attractive proposition.

It’s here that left and right need to put their ideologies to one side and ensure that “pension law and regulation can adapt to the issues of the future, rather than the problems of the past”, as stated by Field.

While it may seem unfair, final salary pension scheme members are stuck between a rock and a hard place. Accepting reform to pension entitlements by conceding that pensionsin- payment indexation is unaffordable, older workers in some of the businesses at risk could in theory make these companies more attractive to buyers, and thereby help to save more of their pension pots, while holding out for the pensions they think they were promised could put more of their pension at risk, if companies fail and the schemes are put into the Pension Protection Fund (PPF).

We have to find a third way – one that allows companies to reduce final salary pension entitlements so they are no longer, in the words of Paul Johnson, “a burden on the young”. And it will take brave politicians on all sides to grasp the nettle of DB pensions and stand up for younger generations.

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