LOS ANGELES — Profit is usually a top priority on Wall Street, but some of the latest ventures into finance by start-ups seem to be inspired more by Karl Marx than John Pierpont Morgan.
A number of new financial start-ups are trying to reach younger and middle-class Americans by upending the customary fee structure of traditional brokerage firms and money managers. They are backed by deep-pocketed venture capital investors — and even celebrities like the rapper Snoop Dogg — who are wagering that these upstarts can challenge the Wall Street establishment.
Aspiration, a start-up wealth manager on Sunset Boulevard here, which had its official debut last month, is asking customers to pay whatever they think is “fair.” That can be as much as 2 percent of their assets, or as low as zero. Reflecting its high-minded goals, the company has also pledged to donate 10 percent of its revenue to charity.
Robinhood, a new brokerage firm based in Palo Alto, Calif., whose founders were inspired by the Occupy Wall Street movement, introduced an app this month that lets customers trade stocks without paying commissions. (The firm plans to make money by offering margin loans and by collecting a portion of the interest earned on customer money invested in money market funds.)
Big banks and brokerage firms haven’t been sitting still. Charles Schwab, for example, recently said it would introduce an automated investment service that doesn’t charge advisory fees. But many are constrained by new regulations or their own inertia. The public’s persistent skepticism of these institutions in the wake of the financial crisis hasn’t helped, either.
Some industry experts have voiced skepticism about the viability of the new business models, including those of Aspiration and Robinhood. But venture capitalists have been happy to bet that technology-focused start-ups can offer more appealing products for buying stocks or managing savings.
Aspiration has raised $4.5 million from investors including Jeff Skoll, the first president of eBay, and Joseph N. Sanberg, a former managing director at the investment firm Tiger Global Management, which manages hedge funds and other strategies. Snoop Dogg and the actor Jared Leto recently invested in Robinhood, joining venture capital firms like Andreessen Horowitz that have helped the company raise a total of $16 million.
“There’s room for an investment firm with a conscience, at a time when Wall Street is facing this enormous level of distrust,” said Andrei Cherny, 39, Aspiration’s chief executive, who has a background in politics, having worked as a state prosecutor in Arizona and earlier as a speechwriter in the Clinton White House. “It should be incumbent on us to prove to our customers we’re doing a good job for them. If we can’t prove that, they shouldn’t pay us.”
Two recent initial public offerings of finance-related companies have helped amplify interest in the sector. Lending Club, which connects individuals to potential lenders, and OnDeck Capital, which makes loans to small businesses, had successful stock market debuts this month, creating windfalls for their backers.
For all their slick technology and fresh ideas, start-ups like Aspiration and Robinhood face considerable challenges, not least of which is figuring out how to turn a profit.
“There are disruptive forces for good, and then there’s disruption for the sake of disruption,” said Joshua M. Brown, a financial adviser at Ritholtz Wealth Management, who worked as a stockbroker for over a decade and now runs a blog called The Reformed Broker. “I worry that some of these new things are like, ‘We have a bunch of money from venture capitalists. What’s a profitable thing that we can give away for nothing?’ ”
Aspiration, whose 10 employees have backgrounds on Wall Street and in technology, is still in a fledgling stage. The company, which calls itself “an investment firm created for the middle class,” requires customers to invest a minimum of $500 and no more than $100,000. To oversee its flagship fund, Aspiration has hired Emerald Asset Management, an investment manager in Pennsylvania, which will earn 27 cents of every dollar that customers deem it fair to pay.
But the investment strategy Aspiration is following has performed poorly this year in the face of a strong overall market. Its flagship fund invests in so-called liquid alternative strategies, which use stocks, bonds and other assets to try to minimize volatility.
This year through Friday, a comparable category called a multialternative strategy returned 1.59 percent, according to Morningstar. During the same time, a conservative allocation, which includes a mix of stocks, bonds and cash, returned 4.09 percent, Morningstar said.
Even if they pay nothing in management fees, Aspiration’s customers must still bear certain costs. Those include fees and expenses, stemming from the mutual funds that the flagship fund invests in, which total 1.72 percent of assets, according to the fund’s prospectus.
Mr. Cherny, the chief executive, compared Aspiration’s pay-what-you-wish model to tipping in restaurants — in both cases, customers “think it’s the right thing to do.” But Josh Charney, an analyst at Morningstar, said he was skeptical.
“I can’t imagine this working very well in the financial world unless the fund manager feels it’s necessary to donate his time as a public service,” Mr. Charney said.
Robinhood, like other financial start-ups, says it aims to serve the “new generation,” young people with little experience investing in the stock market. Its founders, Vladimir Tenev and Baiju Bhatt, met as undergraduates at Stanford University and went on to start two companies together, including one that made software to help banks and hedge funds trade stocks. But the Occupy Wall Street movement that started in 2011 made them rethink their goals.
Friends would ask, “Why are you working in finance? Aren’t you part of the problem?” Mr. Bhatt, 29, recalled. For their third company, Robinhood, they kept those sentiments in mind when settling on a business model.
“We sort of looked around and saw that people in our age group, like our friends, weren’t really interested in the markets,” Mr. Tenev, 27, added. “They were either openly distrustful or they weren’t really engaged.”
One previous effort to offer free stock trades didn’t have much success in undercutting the big online brokers like Charles Schwab and E-Trade (which themselves were once the so-called disrupters). In 2006, an online brokerage firm called Zecco made a splashy debut with a promise to charge nothing for trades — and even handed out free hot dogs to underscore that there was such a thing as a free lunch.
By 2009, with interest rates having fallen in the financial crisis, Zecco changed its policy to require a $25,000 minimum account balance to qualify for 10 free trades a month. In 2011, the company did away with free trading altogether and adopted commissions of $4.95 per trade.
“They set out to make money on interest rate revenue, similar to what Robinhood is saying,” said Richard J. Hagen Jr., the president of TradeKing, which bought Zecco in 2012. “They found it pretty hard to make money that way, especially in the interest rate environment we’re in today,” with rates still near rock bottom.
In addition, younger customers tend not to trade heavily on margin, or with borrowed money, Mr. Hagen said. Of the TradeKing customers between the ages of 18 and 35 — the demographic Robinhood is going after — just under 2 percent have ever had a margin debit greater than $100, a TradeKing spokeswoman said.
A spokesman for Robinhood said in an email that while the founders had not studied the experience of Zecco, “We are confident that our mission, business model and approach make sense for the current climate.”
For Aspiration, the experience of Café Gratitude in Berkeley, Calif., may be instructive, said Mr. Charney, the Morningstar analyst. The restaurant for years offered a rice bowl for a suggested donation rather than a set price. But it removed the dish from its menu in 2012.
“Because we didn’t have a minimum for the donation, people were donating like 50 cents when the suggested donation was $7,” said Rebecca Ainsworth, the cafe’s general manager. “It just ended up not being sustainable.”