Robinhood: The Risks Of Free Investing

Robinhood is a commission-free trading platform that has gained popularity among young, first-time investors. The app is known for its user-friendly interface and ability to trade stocks, bonds, ETFs, crypto and more. However, there are several reasons why one might choose not to use Robinhood as their primary investment platform.

One of the main concerns with Robinhood is its limited investment options. The platform does not offer mutual funds or individual bonds, which can make it difficult for investors to build a diversified portfolio. Additionally, Robinhood has been criticised for encouraging irresponsible investing by making trading too accessible and gamified. This has led to some users incurring significant losses.

Another issue with Robinhood is its payment for order flow (PFOF) business model, where the company receives payments for routing customer orders to specific market makers. While this is a common practice in the industry, it has raised concerns about potential conflicts of interest and the possibility of slightly slower order execution.

Furthermore, Robinhood has faced regulatory scrutiny and fines for various allegations, including system outages, misleading users, and allowing customers to trade options when it was not appropriate. The company has also experienced security breaches, with personal information of some account holders being compromised in 2021.

Overall, while Robinhood can be a good introduction to investing for beginners, it may not be the best choice for more serious investors due to its limited investment options, regulatory concerns, and security issues.

Robinhood's investment selection is limited. It doesn't offer mutual funds, individual bonds, or fixed income

Robinhood is a financial services company that allows individuals to trade cryptocurrencies, exchange-traded funds (ETFs), individual stocks, and options. It offers commission-free trades and services similar to any other brokerage company.

However, Robinhood's investment selection is limited. It does not offer mutual funds, individual bonds, or fixed-income trading. This means that investors who are looking to build a truly diversified portfolio may find Robinhood lacking.

Robinhood's limited investment options also mean that it is not suitable for more advanced investors. While it offers low costs, its offerings may not be robust enough for those who are looking for more complex investment strategies.

Additionally, Robinhood's third-party research, data, and news offerings are limited compared to other brokers. Morningstar and Nasdaq Level II market data are the only choices, and they are only available to Gold members who pay a monthly fee.

Overall, Robinhood's limited investment selection may be a significant drawback for those who are looking for a comprehensive investment platform. Its lack of mutual funds, individual bonds, and fixed-income options may make it difficult for investors to build a well-rounded and diversified portfolio.

Robinhood's customer support is lacking. It doesn't offer direct phone or live chat support for prospective customers

Robinhood is an online broker that offers $0 commission-free trades in stocks, ETFs, options, and cryptocurrencies. It is designed for individuals new to investing and targets a younger demographic of investors. However, its customer support has been criticised for being lacking, with no direct phone or live chat support for prospective customers. Current account holders must email or use the app for live chat or to request a phone call back.

Robinhood's customer support has been described as "maddeningly sparse" and "inadequate". There are numerous complaints from customers who have struggled to get in touch with the company. One customer complained that they "cannot get a live support person to help me with my issue" and that they had "lost close to $1000" as a result. Another stated that they had been waiting "a week and a half to have [their] account verified" and that it gave them an "uneasy feeling" not to be able to access their money.

Robinhood's customer support has also been criticised for its response times. One customer stated that it took 2-3 days for support to get back to them during busier times. Another said that they had been waiting "over a week" to have their account verified.

In addition to the lack of direct phone or live chat support, Robinhood has also been criticised for the quality of its customer support. One customer complained that all the company did was "copy and paste what you already know" and that they "don't even answer questions directly". Another stated that the company's responses were "useless" and "automated".

Overall, while Robinhood offers commission-free trades and an easy-to-use platform, its customer support is lacking and has been the subject of numerous complaints.

Robinhood's trading platform is basic. It lacks tools for active traders and doesn't support bracket orders or hotkeys

Robinhood's trading platform has been described as basic and lacking tools for active traders. It does not support bracket orders or hotkeys.

A bracket order is a powerful and advanced risk management tool that all traders should use. It creates a bracket, or a take-profit and stop-loss around a position. This means that once the position has been closed, the untriggered order from the bracket is immediately cancelled.

Hotkeys, on the other hand, are keyboard shortcuts that allow traders to quickly place orders without having to use a mouse. This can be especially useful for day traders who need to move in and out of trades within seconds to minutes.

While Robinhood does offer a streamlined interface and free stock, options, ETF, and cryptocurrency trades, its platform may not have the advanced features and functionality that active traders need.

Robinhood's security has been questioned. It has faced multiple fines and lawsuits over the years

Robinhood's security has been questioned over the years, and the company has faced multiple fines and lawsuits.

In 2019, the Financial Industry Regulatory Authority (FINRA) fined Robinhood $1.25 million for best execution violations related to its customers' equity orders and related supervisory failures. The company was found to have routed its customers' non-directed equity orders to four broker-dealers, all of which paid Robinhood for that order flow, a practice known as "payment for order flow" (PFOF). This practice has been criticised as a conflict of interest, and while its effects are negligible for most investors, it's possible that PFOF brokers could execute orders slightly slower or at slightly worse prices than non-PFOF brokers. Robinhood's order execution quality is 95.62%, slightly worse than the average among brokers.

In 2020, the Securities and Exchange Commission (SEC) charged Robinhood with misleading customers about its revenue sources and failing to satisfy its duty of best execution. The SEC found that Robinhood made misleading statements and omissions in customer communications about its largest revenue source, which was payments from trading firms in exchange for Robinhood sending its customer orders to those firms, also known as PFOF. Robinhood agreed to pay a $65 million fine to settle the charges.

In 2021, Robinhood was fined $70 million by FINRA, the largest fine ever imposed by the regulator, for a series of failures that hurt its customers. This included false and misleading information and harm suffered by customers from system outages in March 2020.

Robinhood has also been criticised for its decision to restrict trading during the extreme market volatility surrounding GameStop and other heavily shorted stocks in 2021. While other brokerages also took precautions, Robinhood's restrictions were more expansive. The company has since beefed up its capital holdings, compliance and risk management procedures, and customer support team to avoid similar issues in the future.

In January 2024, Robinhood agreed to pay a $7.5 million fine over charges from Massachusetts securities regulators, who argued that the company used gamification tactics and in-app experiences to encourage riskier trades and strategies.

In addition to these fines and lawsuits, Robinhood has also experienced a data security incident in 2021, in which personal information for a portion of account holders was revealed. The company stated that it did not believe bank account, debit card or Social Security information was affected, and no customers experienced financial loss.

Robinhood's business model has been criticised. It makes money through a system known as payment for order flow, which has been deemed a conflict of interest

Robinhood's business model has been criticised for its use of a system known as "payment for order flow" (PFOF). This practice involves routing trades through market-makers like Citadel Securities in return for a slice of the profits. While this has helped drive down commission fees, it has also created a conflict of interest between the broker and its clients. Critics argue that brokers have an incentive to direct order flow to market makers offering PFOF arrangements over the interests of their clients. This conflict of interest became particularly apparent during the GameStop short squeeze, when Robinhood changed the rules to protect its "real" customer, Citadel, rather than its retail investors.

Although PFOF is banned in the UK and the EU is phasing it out by 2026, Robinhood CEO Vlad Tenev has defended the practice, saying that it is "inherently here to stay". He argues that transaction-based revenue is reasonable and that concerns about PFOF have been politicised. However, others disagree, pointing out that investors could be unwittingly losing out due to inferior execution prices. While Robinhood has diversified its business, PFOF still accounted for 5% of its revenue in the second fiscal quarter of 2023.

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