It’s likely you’ve heard of Robinhood, the trading platform that allows you to buy and sell stocks for free. It’s also likely you’ve opened an account and were impressed with their clean design, jargon-free content, and slightly advanced features. It’s even possible that you’ve recommended the platform to a friend or two.
Robinhood has democratized the stock market and made it accessible to anyone who wants to invest. But can we trust the platform? Is it reliable? Does Robinhood really have its users’ interests at heart? In this article, we want to make the case as to why Robinhood is not the best place to invest in the stock market, and why you should consider switching.
If you have been following the news, you may have noticed that Robinhood has suffered many outages this year. Three of them happened within the space of a week in March 2020, and, according to some, the platform has been experiencing outages practically every month. On one of the most volatile days in the past 50 years (March 16th), Robinhood was down and people didn’t have access to the market. This cost some people thousands of dollars, and the company is now subject to more than 400 complaints. In a Bloomberg article, one investor complained about having lost $6,000, while another lost $20,000 — that’s a lot of money! To make matters worse, their customer service reps were nowhere to be found throughout the outages.
The Robinhood platform is not reliable. Even if you don’t day trade and prefer buying and holding, these recent events should startle you. What could it be next time? Considering the tragedy of Alexander Kearns who committed suicide when a Robinhood glitch showed a negative account balance of $730,000, we could expect anything. Yes, other platforms also suffer outages and Robinhood is a young company in comparison, but do you feel safe putting your money into a platform that goes down when most of its users need it most?
Robinhood encourages day trading. This means they encourage you to time the market and buy individual stocks with free commissions, intuitive account features, and relatively easy access to complex investing derivatives. It’s fun and it can be rewarding, but most of the time you’ll be losing money.
Professional fund managers are people who have spent decades studying the market and learning about the ins and outs of companies. They buy and sell stocks professionally, and try to “beat” the market by making more than 8% every year. These are professionals, and yet 96% of them fail to beat the market over a 15-year lifetime. If a professional can’t do it, an amateur on Robinhood certainly can’t.
Picking stocks is more like a game rather than a long-term investment. If you want to make money over time, ETFs and index funds are the way to go. As we’ll see below, Robinhood hasn’t been designed for long-term investing.
Robinhood grew in popularity because it offered a unique feature: zero commissions. This means you could buy and sell stocks for free. This was revolutionary when they first founded the company because most brokers back in 2013 charged pretty high fees.
But this is no longer revolutionary. In fact, Charles Schwab, TD Ameritrade, and eTrade have recently announced they are also dropping commissions to zero (at Unifimoney, we are also commission-free!). Robinhood’s main feature is no longer unique since everyone else now offers a similar structure. Its fee structure was its only advantage, and now it’s obsolete. This makes you wonder if a Robinhood account is worth the disadvantages of opening an account with them.
Robinhood doesn’t offer many options to those who like to purchase alternative investments and diversify their portfolio. In fact, they have a minimal selection of cryptocurrencies and don’t offer investments in precious metals or commodities. The platform won’t allow you to transfer Bitcoin out of your account into your own wallet, which means you’ll be stuck with leaving your Bitcoin on Robinhood and not in a secure private wallet.
If you want to invest in other assets, you’ll need to open another separate account with another broker. Unless you want app fatigue, it’s best to keep everything in one account.
ETFs and index funds are the best way to grow your money in the long term. To further maximize your growth, you want to be buying funds through tax-efficient accounts, such as IRAs, 401ks, and 529 plans. These accounts allow your money to grow over time tax-free, which in return means more money for you down the road.
The bad news is that Robinhood only offers a standard individual investing account. They don’t offer any IRAs or tax-efficient accounts at all. They also don’t offer bonds, which help diversify your portfolio and lower the risk. Basically, Robinhood is not a good platform to invest in long term goals — you can’t shelter your investments against taxes and you can’t diversify your portfolio. Robinhood offers an account to those who just want to play around with stocks. That’s fine if you want to have some fun and don’t mind losing a bit of money, but if you are investing for your retirement, a house deposit or your child’s education, Robinhood won’t help you out.
Of all the disadvantages, this is the most relevant one. If commissions are free, how does Robinhood make money? Remember that when a service is free, you are the product.
In this article from Seeking Alpha, Logan Kane breaks down how Robinhood makes money. Their premium Robinhood Gold account that charges users $5 per month is not enough to explain their $8 billion valuation, so there’s definitely more going on. Instead, Robinhood makes money selling their users’ data to high-frequency trading firms — this is called order flow. These firms then use this data on their own algorithms to understand how retail money moves.
According to Logan, these HFH firms pay Robinhood $260 off $1,000,000 moved, which is 10 times more than they pay other brokerages. He explains that if Robinhood made as much trade volume as eTrade, they would be making $500 million per quarter in payments! Just this month, the broker is facing fines from the SEC for not disclosing deals with these traders.
There are two things to be concerned about here:
Read their “How we make money” page and try to understand what their second paragraph is saying. As you can see, they have made it confusing on purpose. Their business model is not clear, and the only way to understand how they make money is to dig into their SEC filings.
The reason Robinhood does this is that their business model is not sustainable on free commissions. So instead, they resort to selling their users’ data and implementing a less transparent user model.
We’ve seen many other brokers and Fintech companies shift their business models in order to make a profit, jeopardizing their relationship with users. That’s why at Unifimoney, we’re building a sustainable business from the start. With Unifimoney, you are not the product. That’s because our business model is built on high-value and invested users: you need to commit a minimum deposit and be an active user, or you pay fees. This allows us to offer our best customers the best service possible without subsidizing the inactive users.
Robinhood says they are “democratizing finance for all”, and yet do this at the expense of their users’ privacy and brand trust. The fact that they are not transparent about their business model should be enough to encourage users to look elsewhere.
If you are looking for a bank account that will help you invest in the stock market for free, has a sustainable business model, and will actively reward you for being a customer, we suggest Unifimoney! 👇
The above does NOT constitute an offer, solicitation of an offer, nor advice to buy or sell specific securities. The opinions listed above are not the opinions of Unifimoney Inc. or Unifimoney RIA, Inc. but represent the opinions of independent contributors. These contributors may or may not hold positions in the stocks discussed. Investors should always independently research any stocks listed and form their own opinions, while recognizing that any investments made may lose value, are not bank guaranteed and are not FDIC insured.