There have been a lot of articles about using Robinhood (NY Times for example). This is especially true after the recent SC fine (link). While some of the complaints against Robinhood are well deserved, I feel like some of the blame should be placed on us (the user).
Personal Bias
Let me start by being clear about my biases in this post. I have been using Robinhood since August 2017. I have my gripes with the app (especially with the recent outages – link). There is also recent news about alleged hacks (link), which may be user error, but Robinhoods handling of the situation has not seemed…great. That being said, I find the UX for Robinhood to be clear and concise. I only have a small number of my total assets in it (2%) but I have found it very helpful to get into investing outside of my regular 401(k).
Robinhood Issues:
1.Payment For Order Flow
The main complaint is you get what you pay for. Robinhood (unlike many other trading platforms at the time of their launch) provided commission-free trading. Other brokerages on the other hand would charge you anywhere from $1-$50 (link) every time you bought stocks. Now because of companies like Robinhood, most brokerages provide commission-free trading. But with free trading, like other free technology, (I’m looking at you Facebook), you were paying another way.
What Robinhood does is something called “payment for order flow”. What this means is that when you place an order on Robinhood, it sends the order to someone else (Investopedia explanation). This can help keep the companies cost low but another benefit is that the company (in this case Robinhood) gets paid by the company they send sent your stock order. The reason SEC fined Robinhood is that they did not make this clear to their clients a few years ago.
This is an issue, but this process is something that most other brokerages do as well. This is/was not unique to Robinhood. Another important aspect of this is that Robinhood makes a larger portion of their income from this method. Click on the Investopedia link above to see the breakdown of the payments received.
For my personal use, I have only placed orders for equities in Robinhood and held them. I am not making a large number of orders or day trading. The more trading you do on the app, the more money Robinhood makes, and also the more likely you are to be impacted by this process.
2.Gamification/Ease of Use
Another complaint is that Robinhood was marketing and nudging amateurs to take more risk (link). On the other hand, Robinhood has argued their app is setup up to strive for their mission to “democratize finance for all” (link).
I am a strong proponent of gamification and making tools easy to use. It fascinates me how this complaint and mission seem like two sides of the same coin. I just opened an IRA with Fidelity and can tell you it was a night and day difference from using Robinhood. It was not clear how to accomplish what I needed to do. As someone who feels like they understand at least the basics of what they were trying to accomplish, I felt more like I was going to make a mistake using Fidelity. I have also used Fidelity for a 401(k) previously, so it is not like I was completely unfamiliar with using their site. On the other hand, placing orders in Robinhood is very clear and simple to do.
Now should Robinhood add tools and help to try and explain some of the topics they are trying to gamify? Definitely. That is probably something they are going to be pushed to do because of some of these complaints. But that is something that happens with new companies. They try new things and get push back because of the response to those new ideas. Some ideas are revolutionary, others are just plain bad.
That being said you should do your research before making investment decisions. Investing is not a game (even if the app you are using is gamifying it). If you are not able to handle those types of nudges and gamification to make responsible decisions, maybe Robinhood is not the tool for you. If virtual confetti is convincing you to buy and sell more stock then I would argue you are not someone who should be investing through an app like Robinhood.
Transparency and Ownership
Transparency
Knowing how a company you use makes money, matters. This is why the SEC fine is understandable. But now that you know how Robinhood makes their money that should be in the back of your mind when you are using the app. Blaming Robinhood for your mistake is like blaming your car for speeding. Just because the tool you are using allows you to do it, does not mean you are not responsible for making that decision.
Not to go too far down the whataboutism rabbit hole, but I think it is also important to point out that some other brokerages have had their share of issues as well. Fidelity was charged for allowing their executive and employees to accept gifts in 2008 (link). E*Trade was charged for their handling of some Penny Stocks in 2014 (link). No company is perfect but it is important to have organizations like the SEC to keep them honest and for us as the users to stay focused on what we can control and stay informed about what is happening.
Personal Responsibility
One issue I have with many of these articles is that they are passing the blame on to Robinhood. As someone who has used Robinhood for a few years, I have not used margins, options trading, day trading, or “gambled” a significant amount of money in the app. One reason for this is many of these go against my principles for investing. The other reason for not using some of these parts of Robinhood is that I honestly just don’t have a clear understanding of them.
If you do not have a great handle on self-control, using an app like Robinhood might be a bad idea for you. You have other options like a financial advisor which may work better for you. They would be able to help talk through decisions and help talk you off the ledge when things get tough. By having an advisor, they also provide some distance between you and the trigger. This added step slows down your process and gives you time to think.
Also if you are using Robinhood to try and “Get rich quick” or use it for gambling and not investing, then you will get burned. Especially if you do not have the right knowledge about what you are trying to accomplish. Just because inexperienced users are using Robinhood to do this, instead of other brokerages like E*Trade or Fidelity, should not be a reason to drag down Robinhood. Users who decide to use their tools in this way only have themselves to blame. A lot of people think that they can day trade. Just because you can, does not mean you will be good at it. Only 1% of day traders are consistently successful (link). If you are reading this post, I feel fairly confident that you are not part of that 1% (sorry!).
Investing is an important tool to gain and build wealth. You can no longer sock away money under your mattress or in a bank account and expect it to grow enough for financial stability in the future. I believe an app like Robinhood provides a tool to make investing accessible. But before you start, you should have principles and rules that you follow as guidelines.
Do you Agree? Disagree? Feel free to let us know!
All of these opinions above are those of the writer and not of their employer(s). Nothing written above should be considered investment advice. These blog posts should be used for educational purposes only. This post is also not sponsored or endorsed by any company. For more information please read our Terms.