by Howard Lindzon
There was a HUGE acquisition in the wealthtech space this past week as Altruist was acquired by Vanguard for over $4 billion in cash. Vanguard is a much needed competitor in the RIA/wealth management space as Schwab and Fidelity pretty much control the market. Customers need choices. This battle of the old guard in ‘Brokerage 1.0’ further sets the stage for ‘Brokerage 2.0’ which I started writing about a few months back.
As my partner Matt Ober wrote this week, large wealthtech investments have been rare. With this massive Altruist acquisition, the stage is now set for that to change. Our firm Social Leverage has made many wealthtech investments since 2017 including - Secfi.com, Fiscal.ai, Koyfin.com, Alpaca.com, Useseeds.com, Leatechnologies.ai, Frec.com, Syntheticfi.com). We believed the wealth category of the world was exploding and would spread to the investing category. Our assumption was that the wealthy would need/want unique financial services at scale. The IPO’s of $SPCX ( ▲ 0.45% ) and soon Anthropic further prove that point as do the massive forever private companies like Stripe and Databricks.
When we (Social Leverage Fund 1 and 2) invested back in Robinhood in 2013 through 2015, Robinhood was NOT self-clearing. They did not go self clearing until 2018 and so Apex clearing made most of the money from transactions on the Robinhood platform. In 2018, going self-clearing was considered a bold move. Self-clearing is expensive and brings extra risk with those added ‘margins’ to be gained from each transaction.
Venture Capitalists say they want companies to ‘go fast and break things’. Uber did. AirbnB did. The difference was those companies were not dealing with The SEC. Going fast and breaking things is frowned upon by The SEC (until The Trump administration has put an end ‘wink wink’ ).
Bakertilly, a large consulting and tax firm, detailed the growing trend in self-clearing that accelerated back in 2024. The gist:
Why are firms making the push to become self-clearing?
The decision for a firm to transition to self-clearing or to outsource its operations elsewhere is influenced by various factors. Two significant considerations are gaining enhanced control and efficiency throughout the entire trading process and striving to boost profit margins by eliminating fees paid to clearing firms for their services, such as commission fees and market rebates.
One of the more prominent factors that influence a firm’s decision is the control over the trading process, which might not be attainable if they used an external third party. Having in-house trade clearing allows the firm to have start to finish control over any trades executed, which in the rare case of a trade execution error (such as an incorrect buy amount input) this allows the firm to quickly mitigate the issue since there is no need to go through the process of contacting the clearing firm to resolve the issue, saving time and effort. Without relying on an external third party providing these services, communication is streamlined, which allows the firm to provide quick and direct answers to their clients, or vice versa, for greater efficiency.
While these benefits may suggest that transitioning to self-clearing is the obvious choice, there are certain attributes a firm must possess to successfully transition, as self-clearing may not be the most logical choice for all brokers. While a broker will need sufficient capital and industry expertise to undergo this change, the most critical requirement for success is a highly competent operations team within the firm that is capable of effectively implementing the necessary back-office technologies, as well as conforming with industry regulations and standards that come with a clearing firm function. If a firm cannot do this, the push to self-clearing may not be the right move.
Alpaca ( Social Leverage Fund 3) went self-clearing back in 2024. The company is growing faster than ever as the 1,000 Robinhood’s around the world need Alpaca’s clearing services much like Robinhood needed Apex back until 2018. What is likely different for Alpaca versus Apex, is that most of these ‘Robinhood’s around the world ‘ will never be large enough or sophisticated enough to go full US self-clearing.
I was in San Francisco this week brainstorming with Mo the founder of the very fast growing Frec (Social Leverage Fund 4), which clears on Apex, discussing this very topic. The founder of Altruist is a Frec investor himself.
The ever expanding global degenerate economy combined with the path trailblazed by Robinhood has created a unique environment where ‘cutting out the middlemen’ is possible. As Jeff Bezos famously says…’your margin is my opportunity’.
Of course crypto/blockchains look to go around all of the middlemen including ‘self clearing’ with tokenization which Alpaca and Robinhood are both leading the way. It is why $HYPE ( ▲ 2.48% ) is in my degenerate economy index as well.
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