By SHEILA OLSON Updated Jan 31, 2021
Is Robinhood Safe for Investors?
(investopedia.com) – Robinhood, the mobile-only online brokerage that disrupted the financial technology industry by charging commission-free trades, was launched in December 2014 with a waitlist of more than 500,000.1 Company founders Vladimir Tenev and Baiju Bhatt, Stanford physics graduates, believed that Robinhood would motivate a new generation of would-be investors with their mobile platform.2 Robinhood’s mission was to make the financial markets more accessible, primarily by offering zero-fee trades, no account minimums, and an easy-to-use mobile app—even if some were skeptical.
Robinhood launched a premium trading platform, Robinhood Gold, offering extended-hours trading, margin accounts, and larger instant deposits in exchange for a flat monthly fee based on Gold Buying Power tiers.3 For example, margin accounts in the $3,000 to $6,000 range with $3,000 of margin buying power are charged $15 per month. There’s no doubt that Robinhood has won a loyal following, and the company is backed by major players such as Google Ventures, Index Ventures, and Andreessen Horowitz.4 But is it safe? Here’s what you should know.
- Mobile-only brokerage Robinhood is easy to use and charges no commissions, but investors worry about the brokerage’s access to IRAs and financial advisors. Some also believe it is too easy to use and causes investors to make hasty decisions.
- Robinhood Gold is an upgraded service that gives investors access to a margin account, but the increase in usable capital can be just as much a risk as a benefit, causing some investors to overleverage an unbalanced portfolio.
- Many investors consider other brokerages a better offer. Even though they charge commissions on trades, access to funds and retirement accounts make them a desirable choice.
Understanding Robinhood’s Safety
Robinhood, as noted in Investopedia’s review of the platform, was an exciting mobile platform that attracted new investors who wanted to trade in small quantities. Despite the simple user interface that demystified trading for many, some investors questioned if the platform was too good to be true.
Luckily, Robinhood, like all brokerage firms that handle securities, is regulated by the Securities and Exchange Commission (SEC), which oversees the securities market to ensure transparency and fair dealings.5
The SEC’s primary compliance mechanism is prosecuting civil cases against companies and individuals that commit fraud, disseminate false information, or engage in insider trading. However, the SEC does not offer protections for the individual investor—it does not insure against loss or otherwise protect your investment from actions your brokerage firm may take.https://ab37a0185f778a535756aa45c7fbd7e5.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html
In addition to SEC regulation, Rohinhood also maintains membership in the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) in which most brokerage firms voluntarily participate.6 SROs are overseen by the SEC, but they are not part of the government. Brokerages that are FINRA members submit to the organization’s rules and regulations, which cover testing and licensure of agents and brokers and a transparent disclosure framework that protects investors.7
What Robinhood claims to have saved their users in commissions and fees.8
What Other Protections Are Available?
Investment accounts with Robinhood are covered by the Securities Investor Protection Corporation (SIPC), which is a nonprofit membership corporation that protects money invested in a brokerage that files for bankruptcy or encounters other financial difficulties.9 SIPC was created by Congress in 1970 under the Securities Investor Protection Act (SIPA).10
It has no authority to investigate or regulate its members—it exists only to restore investor funds (up to $500,000 for securities and cash or $250,000 for cash only per account) held by financially troubled brokerages. All Robinhood accounts are protected under the SIPC.
Are There Other Risks Associated With Trading on Robinhood?
For most investors, the potential risks involved with using Robinhood aren’t associated with the regulatory framework covering their accounts. For instance, Robinhood is a very sleek and minimal application, and investor tools are rudimentary compared with those of other major brokerages like TD Ameritrade Holding Corporation (AMTD) and E*Trade Financial Corporation (ETFC). This can lead to hasty and uninformed decision making, especially for novice investors.
In addition, the Robinhood app makes it difficult to manage a diversified portfolio. Most reviewers suggest that tracking more than three or four positions isn’t practical with Robinhood, which leads to overweighing your portfolio with one or two equities—never a good practice.
It is also worth noting that there is no dividend reinvestment program in place, although the company indicates that this may be offered in the future. The Robinhood platform currently permits only stock and ETF trades—bonds and mutual funds are excluded. Again, this risks tilting your portfolio toward a single asset class.
As a matter of convenience, Robinhood doesn’t integrate with other financial management tools like Mint or Quicken, so there’s no convenient way to track your holdings as a part of your overall financial picture outside the Robinhood app. In addition, there is no IRA account option, excluding investors from the tax savings and long-term benefits of retirement savings plans.11
Is Robinhood Safe? FAQs
Is My Money Safe with Robinhood?
Investment accounts with Robinhood are covered by the Securities Investor Protection Corporation (SIPC), which protects up to $500,000 for securities and cash or $250,000 for cash only per account.
What Is the Catch with Robinhood?
Robinhood was primarily designed for new investors, with a simple user interface and commission-free trades. However, more advanced investors will find that trades on the mobile platform can be limiting: trades tend to be routed based on order flow, there is limited research or resources available, and there are no customization options.
Is it Safe to Enter My Social Security Number In Robinhood?
Robinhood’s security team encrypts sensitive details such as social security numbers, ensuring that they will be safe from hackers.9
Is Robinhood really free?
Robinhood offers commission-free trades in stocks, ETFs, and options. A more in-depth fee schedule is listed on its website, for example regarding regulatory trading fees.12
The Bottom Line
For a certain class of investor, Robinhood may be the right tool at the right time. However, for long-term investors, IRA accounts with a mainstream broker may be a better alternative. In many cases, you can open a no-minimum account and get commission-free trades on many if not most ETFs while still having access to all the data, charts, tools, and educational resources you need to make informed decisions.
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