Is Robinhood Safe for Investors?

Is Robinhood Safe for Investors?

Robinhood is a popular robo-advisor with more than 15.9 million monthly active users (MAU) in March 2022. It's considered a safe option for investors' securities and cash for various reasons. For one, it's a member of the Securities Investor Protection Corporation (SIPC) That means that any loss of an investor's securities (e.g., stocks and bonds) and cash held by Robinhood is protected up to $500,000 (of which up to $250,000 is for cash).

For another, Robinhood is regulated by the U.S. Securities and Exchange Commission because it's a registered broker-dealer. Finally, Robinhood offers added financial protection per customer account of up to $1.5 million for cash and $10 million for securities.

Keep reading to learn more about Robinhood, its safeguards for investors' securities and cash, and the challenges it has faced in the past.

Key Takeaways

  • Founded in 2014, Robinhood charges no commissions or account minimums, making it a user-friendly application for a new generation of investors.
  • Despite the simple user interface that demystified trading for many, some investors questioned if the platform was too good to be true.
  • Robinhood is regulated by the Securities and Exchange Commission and maintains membership in the Financial Industry Regulatory Authority.
  • Investment accounts with Robinhood are covered beyond just standard Securities Investor Protection Corporation coverage.
  • The robo-advisor offers additional SIPC coverage of up to $1.5 million for cash and $10 million for securities per brokerage customer after SIPC coverage is exhausted.

Robinhood: A Brief Overview

A robo-advisor such as Robinhood is an automated digital platform. It invests and reinvests your money based on algorithms. Investing parameters are set up after answering a number of questions about your financial health and goals. Since there is little to no human interaction during the whole process, these services boast low fees.

Mobile-only online brokerage Robinhood disrupted the financial technology industry by charging commission-free trades. It launched in December 2014 with a waitlist of more than 500,000. Company founders Vladimir Tenev and Baiju Bhatt, both Stanford physics graduates, believed that Robinhood would motivate a new generation of would-be investors with their mobile platform. Its 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.

In 2016, it launched a premium trading platform called Robinhood Gold. This service offers investors premium features for a $5 monthly fee and allows them to trade on margin up to $1,000, bigger instant deposits, and access to professional research and Level II market data.

Investors interested in premium features can sign up for a 30-day free trial. 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. But is it safe? Here's what you should know.

Robinhood's Safety

As noted in Investopedia's review of the platform, Robinhood 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). 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. The SEC doesn't offer individual investors any protection, and it doesn't insure against loss or otherwise protect investments from actions that brokerage firms may take.

Robinhood also maintains membership in the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) in which most brokerage firms voluntarily participate. SROs are overseen by the SEC but 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.

$1 billion +

What Robinhood claims to have saved their users in commissions and fees.

Other Protections

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.

SIPC was created by Congress in 1970 under the Securities Investor Protection Act (SIPA). SIPC 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.

In addition to SIPC coverage, Robinhood has what it calls "excess of SIPC" coverage. Through its partnerships with certain underwriters at Lloyd's of London, Robinhood provides an extra up to $1.5 million for cash and $10 million for securities protection per customer, which is triggered when SIPC coverage is exhausted.

Robinhood's Safety and Protections
 Membership  SEC  FINRA SPC
 Robinhood  x x x

Risks 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. This can lead to hasty and uninformed decision-making, especially for novice investors.

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. The Robinhood platform 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 individual retirement account (IRA) option, excluding investors from the tax savings and long-term benefits of retirement savings plans.

Robinhood's Ongoing Challenges

There are challenges that are inherent with brokerage firms and robo-advisors like Robinhood are no exception. For instance, one of the main sources of Robinhood's revenue comes from payment for order flow (PFOF), which the SEC is reviewing. In this practice, brokerage firms receive payments for any client trades directed to market makers. The payments are generally fractions of a penny per share. So while it may not seem as much, it does add up when multiple trades are redirected. If banned, companies like Robinhood would lose a significant revenue stream.

Robinhood has also experienced service interruptions and outages during large influxes of orders made by multiple users at the same time, which was commonly found with trades of highly volatile names. Not only did this lead to customer complaints, but it also meant that Robinhood had to pay a $70 million settlement in June 2021 to cover losses experienced due to these outages, the largest such FINRA penalty. FINRA had fined Robinhood a much less severe $1.25 million in 2019 for best execution violations.

Is My Money Safe With Robinhood?

Investment accounts with Robinhood are covered by more than just the Securities Investor Protection Corporation, which protects up to $500,000 for securities and cash or $250,000 for cash only per account. In fact, Robinhood also provides its brokerage customers with additional excess of SIPC coverage which provides an aggregate of $100 million of coverage—up to $1.5 million for cash and $10 million for securities per customer, after the SIPC coverage is exhausted.

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 payment for 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.

Is Robinhood Really Free?

Robinhood offers commission-free trades in stocks, exchange-traded funds (ETFs), and options. A more in-depth fee schedule is listed on its website, for example regarding regulatory trading fees.

The Bottom Line

For a certain class of investors, 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.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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