Arincen

Item: Robinhood
Rating: 2

From its inception, Robinhood has been a disruptor. In the eight years since its founding, Robinhood has established itself as the brokerage firm for young, modern investors by not charging commissions for crypto trading, stocks and options. However, it hasn’t escaped scrutiny for its trade restrictions during market volatility and badly timed outages. Arincen’s experts take everything into consideration in this detailed review, which will help you decide whether Robinhood is the right brokerage for you or not.

Key Takeaways

Robinhood was founded in 2013 and has its headquarters in Palo Alto, California.
Robinhood claims to have as many as 13 million customers under the age of 31.
The broker is regulated by the US’ Financial Industry Regulatory Authority (FINRA) under registration number CRD #165998.
Robinhood is also registered with the US Securities and Exchange Commission (SEC).
The company is a member of the Securities Investor Protection Corporation (SIPC), which offers members protection of up to $500,000 (including $250,000 for claims for cash).
Robinhood also provides its brokerage customers with additional “excess of SIPC” coverage that provides an aggregate of $100 million of coverage – up to $1.5 million for cash and $10 million for securities per customer.
Robinhood customers can trade stocks, Exchange Traded Funds (ETF), options, and cryptocurrencies.
The broker does not offer trading in futures or FOREX.
New traders are drawn to Robinhood for its low fees, zero balance new account requirement, and its simple as well as user-friendly platform.
For $5 per month, clients can get access to Robinhood Gold, which allows them to view market data and to access in-depth research reports.
Robinhood does not disclose its order flow to its customers, drawing criticism within the industry.
Robinhood has limited customer service options, with no customer service agents manning a phone line.
The broker provides clients with Web and mobile access to its in-house Robinhood platform.
The broker's research and education sections are billed as progressive and in line with new learning trends. However, they are low on content.

Overall Summary

Robinhood was founded in 2013 and has its headquarters in Palo Alto, California. It is a US-only online trading broker. While harboring long-term plans to go global, it has no immediate intentions to venture beyond the US. For obvious reasons, its features are designed to cater solely to the American market.

It is fair to say that, in its short existence, the broker has been the darling of its young clientele, and the bane of regulators. Considered a much-needed disruptor in the industry, it has been fashionable for young investors to be swept up by the broker’s promises to upend the established financial system.

Robinhood claims to have as many as 13 million customers under the age of 31. Many of these clients are first-time investors who have acted as evangelists, speaking out for the company and the purity of its mission to change the investment landscape. New customers come to Robinhood because of the buzz, the low fees, the zero-balance new account requirement, and the simple mobile interface.

The broker’s fees have garnered special attention, with zero commissions on stocks, options, and cryptocurrency trading. This has driven many rivals to copy their approach and join them in eliminating commissions.

However, underneath the hype, Robinhood has a limited range of offerings. Customers can trade stocks, ETFs, options and cryptocurrency, but there is no fixed income, mutual funds, FOREX, or futures trading.

While the broker’s client base has swelled in recent times, its popularity has brought more regulatory attention to its door. Not without reason. Robinhood has received fierce criticism for disruptive service outages and willful trading embargoes during market swings. This has caused concerned members of the US Congress to cite conflicts of interest. Class action lawsuits have followed, giving the broker great notoriety in public circles.

Yet, in the broker’s own words, it is on a mission to “Democratize finance for all.” Robinhood believes “[the] financial system should be built to work for everyone.” The broker speaks about its values being built around unswerving service to its customers. Robinhood insists that its foundations are built upon:

● Safety.

● Participation for everyone in the financial markets.

● Radical customer focus.

● Challenging the status-quo.

However, as you will see from the rest of this review, not all these ideals are supported, with serious question marks around safety and customer focus

Who Is Robinhood Good For?

With so many young customers, Robinhood continues to position itself as a way for young and inexperienced investors to enter the market. In keeping with this ethos, the broker ensures that its trading platform, be it on the Web or via the app, is straightforward and easy to navigate. This has attracted criticism, with detractors claiming its technology is underpowered and basic.

Naturally, the decision to concentrate on inexperienced traders makes Robinhood a great choice for beginners, but discourages experienced traders looking for the next edge. As experienced traders are frequently the highest trading investors by volume, then Robinhood loses out on the chance to serve individual high rollers.

In the end, the simplicity of its trading app and Website platform offers excited new traders exactly the kind of basic environment they need to feel comfortable. On the other hand, any trader seeking a more comprehensive experience will find the range of tools severely limited. Here are some key facts to consider before engaging with this broker:

Pros

Simple and intuitive trading platform.
Low trading costs.
Access to fractional share investing.
Access to a range of cryptocurrency trading opportunities.
Good cash management product.

Cons

Has been part of many high-profile controversies.
Limited research and educational resources.
Limited investment offerings.
Does not offer FOREX trading.
Is not available outside the US.
Lack of transparency around payment for order flow.
Trading platform lacks advanced features.
Accounts only supported in USD.
Account funding is slow and tedious.

Pros Explained

Robinhood’s simple but easy to use mobile app draws criticism from those who say it lacks advanced features. This is certainly true, but its young clientele, who happen to be its core clientele, are very happy with the simplicity of the app. Robinhood considers itself to be different from traditional brokers, meaning it regards itself as a mobile-first broker. It envisions its clients being young urban professionals constantly “on-the-go.” It is selling an aesthetic and a vision. Because of this, the company is not in a hurry to invest in expensive platform development.

One of Robinhood’s other draws is that you can buy fractional shares for as little as $1, which is attractive to young traders who want to get skin in the game. You can trade stocks, ETFs, options contracts and cryptocurrencies, all free of commissions. The broker also sells different features like giving traders access to its more than 75,000 ATMs for use free of charge. Another handy feature is the recurring investment tool, which allows traders to automatically invest a fixed dollar amount periodically.

Cons Explained

Robinhood has a bright and colorfully packaged research and education section, which belies the fact that it does not contain many useful educational resources. Only if you subscribe to Robinhood Gold for $5 per month can you get access to more than the basic quote functions. Gold subscribers get access to selected market news to help them make more informed trading decisions.

Another drawback Robinhood faces is that it has a limited product basket. It does not have any mutual funds or fixed-income investment products. Traders will not be able to trade any commodities, FOREX or futures, many of which have become staples for even modest brokers around the world.

One element that has drawn sharp criticism is that of transparency. Robinhood does not disclose its payment for order flow statistics. Traders cannot compare and ensure accurate and on-time transaction executions. This could be viewed as a lack of transparency, which goes against the broker’s founding principles.

Is Robinhood Safe?

In holding Robinhood to the same standards of accountability as lesser-known brokers, our findings are that Robinhood cannot be considered a safe broker, or, at the very least, must be approached with a healthy degree of caution.

Although the US is a highly regulated financial market, broker failures do happen. For such a young company, Robinhood has been embroiled in its fair share of controversies, which call into question the decisions of its management.

That said, Robinhood is a FINRA (high trust) regulated broker-dealer. It is also registered with the SEC. Furthermore, Robinhood is a member of the SIPC, which offers protection of members up to $500,000 (including $250,000 for claims for cash).

The company provides its brokerage customers with additional “excess of SIPC” coverage through selected underwriters at Lloyd’s of London, which provides an aggregate of $100 million of coverage – up to $1.5 million for cash and $10 million for securities per customer. The excess coverage is triggered when SIPC coverage is spent.

Potential Robinhood customers should be aware of its regular run-ins with the regulators. In 2021, the SEC fined Robinhood for “misleading customers about revenue sources and failing to satisfy duty of best execution.” In the same year, Robinhood gave the go-ahead to settle nearly $70 million worth of regulatory investigations relating to instances where it misled customers, gave the green light to ineligible traders for risky strategies and suffered repeated service outages, badly affecting traders’ ability to access its services.

In the same year, the SEC charged that the broker failed to disclose to customers that its largest revenue source was from the market makers to which it routed customer orders. The SEC deemed that this unfair practice led to trades generating less money when compared to other brokers. This explains why, until today, the broker does not release statistics on payment for order flow. Robinhood has also disclosed serious data breaches within the past few years. The most recent was in 2020, affecting about 2,000 customer accounts.

What started as a disruptive new player in the Fintech space, acting as a savior for young and under-represented investors, has ended up as a questionable enterprise whose handling of customer data and its overall approach to transparency has left a lot to be desired.

Robinhood does make a fist of offering products with enhancements that could be considered safe. Access to its mobile app is guarded by face or fingerprint recognition or with a custom pin. New logins from new devices can only be authorized with a six-digit code, and, in general, best-practice multi-factor authorization is used.

Traders should know that cryptocurrency investments through Robinhood are not protected by the SIPC or the FDIC, but the broker carries crime insurance that covers a portion of the cryptocurrency held in its system against losses from theft from malicious breaches.

As a response to previous customer data breaches, Robinhood will now cover 100% of direct losses due to unauthorized activity in your accounts. There is criticism from some quarters who rightly comment that a well-protected account platform would not require such extensive breach insurance.

Offering of Investments

Robinhood has a limited product basket. Clients can trade the following cryptocurrencies: Bitcoin, Bitcoin Cash, Bitcoin SV, Dogecoin, Ethereum, Ethereum Classic and Litecoin. As far as stock trading goes, Robinhood only offers long selling, with no short selling allowed. This eliminates a large swathe of traders interested in trading stocks.

The company also offers ETFs, options, and over 6,900 symbols that can be bought and sold as fractional shares. As far as order types, traders can either enter market orders or limit orders. Clients cannot order conditional orders, which is common to other brokers.

Account Types

The broker provides three types of accounts, each created for a different type of investor.

Robinhood Instant

This default account is the account every new trader is allocated when they open an account. With this account, traders can access instant deposits of up to $1,000. You can also trade on unsettled funds, which is a nice feature that means you do not have to wait for funds to clear when you dispose of securities.

Robinhood Gold

This account is a step up from the Instant Account. It shares many similarities with the Instant Account, but empowers you through margin investing and larger instant deposits. In the same way as the Instant Account, the Gold Account allows traders access to funds before they have settled.

Eligible traders can take advantage of margin investing, again giving them access to borrowed funds for trading. Gold Account holders also enjoy advanced market research. The cost of a Gold membership is $5/month.

Robinhood Cash

This account gives you instant deposits up to $1,000. Unlike the Instant and Gold Accounts, you cannot trade on unsettled funds from recently sold securities. Traders can downgrade to either of the other two accounts if they are not happy with Robinhood Cash.

Account Opening

To open a Robinhood account, you need to lodge an application for a new account in the Robinhood app. It takes a few days for your application to be approved, or for you to be asked for more information. FINRA and the SEC mandate the harvesting of troves of information to make sure that new investors are not linked to terrorist groups or use their trading account for other illicit purposes.

As a side note, many global brokers can open new accounts in hours, despite their own regulatory requirements. This puts the onerous account-opening process with US brokers into perspective. To keep you interested while you wait for your new account, Robinhood offers clients the chance to queue one deposit while their account is being approved, in order to “ensure a smooth funding experience.”

Demo Account

Unlike many brokers around the world, Robinhood does not provide a demo account.

Bonuses and Promotions

New clients can get “Free Stock” from Robinhood when they open an account. As part of a promotion designed to sweeten the deal for new traders, Robinhood adds one share of free stock to new accounts when traders link their bank account and meet the promotion’s terms and conditions

You can choose to keep the stock or sell it after two trading days. Traders should know that shares chosen for the free stock promotion are selected randomly from Robinhood’s inventory of settled shares. This means new traders receive different stocks.

Robinhood indicates that the price of the share at the time of issue ranges from $3 and $225, and fluctuates as normal, based on market conditions. However, this promotion may not be as lucrative as it seems. The broker is compelled to admit that there is a 98% chance of the stock bonus having a value of $2.50-$10.00, which is not much of an incentive. There are several qualifying points that brokers need to meet to get the benefit of this promotion.

Deposits and Withdrawals

When initiating a deposit with Robinhood, traders can see their transfer history, pending transfers, and estimated landing dates in the Statements and History section of the Account tab. Deposits can be initiated via the mobile app. Traders can make up to five deposits per business day up to a maximum of $50,000.

Deposits can take up to five business days to complete, but could be shorter, depending on your transfer history with Robinhood. The broker only supports deposits via bank transfer, with debit cards, credit cards and electronic wallets not supported.

Withdrawals cannot be initiated until the appropriate waiting days have lapsed. After making a deposit, traders must wait up to five trading days for the transaction to be completed. During this time, they will not be able to withdraw or spend the funds while the transaction is ongoing.

By global standards, this deposit and withdrawal waiting period is interminably long, even if it is standardized in the US. Similarly, after a sale, Robinhood stipulates that it needs two trading days to hold on to the money before it can be withdrawn. This means that you can only initiate a withdrawal on day three after making a sale.

Cash Management

Robinhood has diversified its financial offering to get in step with its younger, more mobile oriented clientele. Robinhood Cash Management is a money-management system where you can use your external earnings not related to Robinhood to spend, invest and earn Interest.

Traders can use the system to receive their paycheck, pay bills and send checks. This is supported by the broker’s network of 75,000+ free ATMs. You can use your Robinhood debit card nearly anywhere Mastercard cards are accepted. Traders can earn 0.3% interest on idle cash, while still being able to access it when they need to.

Customer Service

Robinhood’s customer service takes some getting used to for traders who are accustomed to receiving responsive and immediate service. The broker does not offer the familiarity of a telephone number to call, as all customer service is done through the app or the Website. There is a chatbot, and customers can also leave their phone number and ask for a callback. As a progressive broker, the customer service team is also available on social media.

Commissions and Fees

Robinhood places a premium on its ability to offer nearly free trading. Traders will know that Robinhood is not unique in this offering, as many other market players have caught up. Robinhood does not charge any fees to trade in stocks, options and cryptocurrencies.

Of course, the broker’s Robinhood Gold costs $5 per month, granting subscribers access to certain premium features. Robinhood tries to keep its clients in the loop with disclosures about how it makes money.

Just like many rivals, Robinhood does not charge trading fees. However, some non-trading fees will still take a chunk out of investor capital. A figure of $75 is required to complete an account transfer. An amount of $20 is required as a checking fee to send a domestic check overnight. On the plus side, there are no domestic or international wire fees. Additionally, traders will not have to pay an account opening, account maintenance or account inactivity fees.

The broker makes it known that it generates profits in the other ways:

Interest paid on cash: Robinhood makes interest on uninvested cash that is not required to service its cash management program with partner banks.

Payment for order flow: Robinhood accepts payment from market makers for directing their customer’s equity and options to those trading venues. This is an important revenue source for the broker. However, it does not share details of this order flow, which is a black mark against its transparency record.

Stock loan programs: The broker lends margin securities to counterparties. Basically, it loans your stock and retains the profits.

Platforms and Tools

The Robinhood Website provides a minimalist trading experience by design. The broker intentionally targets clientele who are new to investing and are happy to start with a basic interface. In fact, the broker models its marketing message to make its minimalist interface seem like the trading method of the future. In reality, seasoned traders accustomed to more advanced platforms will be sorely disappointed with the Robinhood platform.

The Web version of the Robinhood platform pales in comparison to many of its rivals. Its charts are basic and feature only four technical indicators. By comparison, direct competitors can offer charts with indicators that number in the hundreds. The platform is not customizable, even though this comes standard with the majority of the world’s brokers.

Mobile Trading

If Robinhood competed in a mobile-only category, it would do well. Yes, its mobile app is no-frills and free of advanced capabilities. But, what it loses in advanced features, it gains in ease of use. Its young customers swear by its invaluable portability during their fast-paced lives. However, the fact is that Robinhood does not operate in a mobile-only category. Today’s investor has a world of choice at their fingertips and sooner or later along a trader’s journey, they will require more advanced tools in order to get ahead and deploy more advanced strategies.

This is why industry staples such as in-chart trading are sorely missed on the Robinhood app. Other useful features that are commonplace with most brokers are conditional orders, multiple order handling, and staged order execution. These functions are not supported by the Robinhood app. On the plus side, Robinhood issues quotes in real time, and you can request quotes on multiple devices at once.

Research and Development

The broker’s research and education offerings are not as comprehensive as they could be, particularly when many of its clients are inexperienced investors. The broker seems to be concentrating on making the educational journey a fun one, with no emphasis on deep detail. Robinhood Snacks, the broker’s so-called “Truly digestible financial news,” is a short-form daily dose of financial news that lasts no longer than three minutes.

The broker also offers a breakdown of its top three business headlines presented in light-hearted story form. Lasting no more than 15 minutes, you can take the top stories of the day on your “Commute, workout, or morning oatmeal ritual.”

Education

The broker’s education offerings are similarly light. The broker offers podcasts and video stories, designed to distill the day’s news into an enjoyable listen or watch. In late 2020, Robinhood claimed to have more than 20 million subscribers to its weekly newsletter and two million monthly active podcast listeners. It has touted this high subscriber figure as a triumph of its methods.

Robinhood has also added a Learn resource, which offers financial information, definitions and market explainers to educate you on financial terms and concepts. According to the broker, it has published in excess of 650 articles on the Learn platform, leading to a 250% increase in average unique daily visitors to its Website. Billed as a “More human way to learn,” Robinhood is redefining how new traders master financial terms.

In our view, while these subscriber engagement figures are impressive at face value, a quick analysis of the resources on offer shows that the required market depth is simply not there. Many brokers who cannot compete on price or volume will usually beef up their research and educational sections to impressive levels. So, research and education is a congested field. Compared to its peers, Robinhood’s research offering does not stack up that well.

Final Thoughts

Strip away the publicity and you will see Robinhood as a simple trading platform where you can trade a limited number of instruments on an underpowered platform. Additionally, after being a market disruptor with its commission-free investing, many other brokers have now joined the zero-fee train.

Robinhood is perfect for new investors who are not well-capitalized, as it makes good on its promise to include marginalized traders. Yet, this comes at a price, as its facilities remain simple by design and it sticks to its promise to be the broker for the ordinary investor.

The broker has made the learning journey easy and fun, if a little light on rigor. Through its mobile-first app and Website, it provides a serious option to trade in stocks, cryptocurrencies and ETFs for traders who have never traded before.

Although the user experience cannot be customized, the app and Website have all the essentials a new investor would need. The broker offers attractive fees, which is a big motivation for many new traders. Yes, its fees are competitive, but they are not the free lunch many people thought they were getting.

Conclusion

Robinhood is a popular broker with its eye on the young professional and emerging broker space. The company does a good job of serving entry-level traders and staying true to its mission of including everybody, regardless of the size of their pocket or their trading experience.

The company is adequately regulated. However, it has been bedeviled by controversy and scandal, and, for that alone, traders should be wary.

The broker’s customer service desk could do with additional contact methods to better serve its varied clientele. Overall, this broker is a good option for traders who are starting out their trading journey and who like to follow trends.

Robinhood in Brief

Robinhood has had a colorful history in its short existence. Its cultural popularity should not absolve it from serious scrutiny for a string of bad management decisions that would have sunk less fashionable companies. Traders are advised to analyze its value proposition carefully.

Review Methodology

The team at Arincen collected more than 120 pieces of data covering in excess of 100 licensed FOREX companies. Data collection was done in three ways:

Companies’ Websites.
Other Websites that have ranked FOREX companies.
A survey questionnaire (referred to here as Survey “1”) we had sent to the companies invited to participate in the exercise.

We have identified 12 criteria for our assessment, each containing several aspects and carrying its own relative weight. These include licensing, deposits and withdrawals, number of assets etc.
Afterward we validated the data by:

Registering with FOREX companies as a secret shopper and/or as Arincen.
Survey number “2,” in which we asked these companies’ customers for important feedback and past experience.

The next step saw us evaluate and rank each company, relying on the hard work of 15 Arincen employees. We were very careful in ensuring the most accurate assessment possible, including taking into account different languages, as well as the various mobile-app operating systems, e.g., Apple, Samsung etc.

To add credibility to our research project, we sent a final and third survey (referred to here as Survey “3”) to enable participating FOREX companies evaluate our own research and whether it accurately reflects the realities on the ground. We were fortunate enough to receive a mark of 9.9 out of 10! We have kept to a minimum the margin of error, which stood at a measly 1%. To learn more on how we came up with the evaluation, please click here.