If you’ve been paying attention to the app-based brokerage industry at all lately, you’ve almost certainly caught word of the industry’s success in bringing in a new generation of investors through innovative business models and proprietary features.
But by the same token, the app-based brokerage industry has had its bad apples, best exemplified by the recent issues surrounding one platform – Robinhood.
Introduction to why I wrote this article
As its name suggests, this all-digital investment platform has been marketed as a method for up-and-coming investors to “take from the rich” capital market and give to those with few financial resources (themselves, namely).
But as its recent issues have revealed, Robinhood still has a way to go when it comes to providing full transparency and structural protection for its users.
If you’ve considered testing out an app-based brokerage service, especially Robinhood, you shouldn’t overlook these issues.
Investing in stocks and securities already comes charged with a degree of risk, so adding a further layer of risk resulting from your brokerage platform may set you up for some major setbacks down the road.
Each of the following issues holds serious weight for Robinhood’s future.
Before you put your financial eggs in their basket, be sure that you fully understand the problems that have recently shaken their users’ trust.
Before going too far though, you’ll need to understand the background surrounding Robinhood, their business structure, and their progress up to this point. Founded back in 2013 by co-founders Vladimir Tenev and Baiju Bhatt, the platform (and its core access point, its mobile app) have been focused on allowing users to trade public company stocks and ETFs (exchange-traded funds) without paying a commission per trade.
As with many app-based brokerage platforms, Robinhood has been primarily geared at so-called “millennials” (those currently age 23 to 33), given that age bracket’s reluctance to take part in capital markets. Robinhood has further incentivized this age group by adding cryptocurrency trading in early 2018.
As of mid-2018, Robinhood and its associated subsidiaries were valued at around $5.6 billion following a successful round of venture capital funding. Around the same time, Robinhood reported user figures comparable to its competitors, at around 3 million.
Recently, the company has made strides to gain US banking certifications that would allow them to undertake further interconnected financial services, such as credit card issuing.
Despite its success financially, Robinhood’s reviews from leading industry sources have been mixed, at best. NerdWallet.com’s Arielle O’Shea gave the platform 4.5 stars out of 5 and noted the added value of the platform’s commission-free user fee structure.
On the other hand, Investopedia’s Theresa W. Carey gave Robinhood a paltry 1.8 stars out of five and decried the app’s fishy history with a non-advantageous trade evaluation model as well as their bare bones research tools.
What’s going on there?
1. Core Service Outages
One of Robinhood’s most noteworthy issues recently came in mid-December 2018, when the platform experienced an unexpected and lengthy interruption to its core services.
This occurred on Wednesday, December 12, and lasted throughout the day. During that time, users reported being unable to access their accounts, save for the brief (and alarming) message, “Account Deactivated.”
As might be expected, this complete lack of access for (according to Robinhood’s estimates) a “small percentage of customers” led to immediate outrage from users, with many noting the immense potential for financial losses due to this system-wide outage during critical trading hours.
To make matters worse, Robinhood partially overcorrected and shut down all options trading during the effected time period.
This left even more users with a bad taste in their mouth, as they were now affected by the outage by proxy, even though their initial capabilities to access the platform were unaffected.
As that Wednesday afternoon went on, Robinhood’s core services slowly began to come back online. But even this effort was subject to controversy, as those who were able to make trades during the down time were sanctioned and limited in further account access due to their “inflated buying power.”
In an attempt to compensate their users (some of whom reported to have lost thousands of dollars in mis-fired trades), Robinhood sent out a platform-wide email offering penance in the form of three free months of “Robinhood Gold,” the platform’s premium services.
This didn’t satisfy a portion of their user base, either, with many feeling that it was improper for Robinhood to compensate their loses by slyly encouraging further monetized use of their platform.
2. Password Exposure
Recently, tech and popular news sources have been ablaze with reports of major websites accidently allowing their users’ personal information to leak out to malicious actors.
Equifax’s 2017 data breach stands out among those, given that it exposed some 143,000,000 individual’s credit information to the open internet due to poor security. Unfortunately, Robinhood has found itself in a similar doghouse relating to a similar incident in July 2019.
During that month, Robinhood sent out emails to affected users recommending an immediate password change due to a potential breach of their on-file password’s security.
Specifically, Robinhood revealed that they had (since the platform’s creation) been storing user passwords in a cleartext format, making them readable to any malicious actor who managed to breach the company’s internals servers.
While Robinhood did not reveal if such a break occurred, they submitted that this security weakness had left user’s vulnerable in the intervening time.
Robinhood asserted that their security protocols had been changed in the wake of this realization, including the use of the Bcrypt algorithm for the storage of all future passwords.
Because of the recent nature of this security flaw’s identification, the full fallout of its impact may not be known for some time. Robinhood themselves remains fairly opaque when it comes to quantifying the volume of effected users and has asserted that the core security flaw was never abused.
Even so, this whole affair left some users with justifiable questions about their trading platform’s faulty security protocols going forward.
3. Uninsured Checking and Savings Feature
Late in 2018 (within the same week as the aforementioned core service outages), Robinhood announced a revolutionary step forward for their trading platform.
Starting in 2019, Robinhood was set to offer a checking and savings feature that would allow users to complete core banking operations using their trading dividends.
This would have helped Robinhood pick up a significant edge on some its competitors, that is, if it had been fully-fledged on arrival.
Regardless of the institution, the American banking industry comes with a significant volume of regulations intended to protect citizens from unscrupulous vendors.
One portion of this regulatory burden includes insuring any banked monetary assets against unexpected insolvency on the institution’s part (a result of post-Great Depression changes).
Robinhood claimed, in public marketing, that this regulatory function would be completed by the Securities Investor Protection Corporation (SIPC)…but in reality, this was never the case.
Within days of this new feature’s announcement, officials at the SIPC denied any certification for Robinhood’s upcoming checking and savings accounts. SIPC CEO Stephen Harbeck was even quick to note that Robinhood’s specific business model for sharing proceeds from securities sales with banked users fell outside of their coverage standards. Moreover, Harbeck told Bloomberg at the time that he had “serious concerns” about Robinhood’s implementation of the feature, as a whole.
As more details of the prospective checking and savings feature came to light, more scrutiny for their structure also rose up.
Most notably, some analysts noted that the true nature of Robinhood’s plan amounted to a near-banking structure that would have left users’ savings exposed to loss, should the US treasury bond market take some dramatic downward turns.
Needless to say, Robinhood’s publicity lasted only a few days before they pulled down all marketing material relating to the upcoming feature. In its place, the company’s co-founders provided a vague blog post that articulated their need to retool the program to meet regulatory standards.
To that end, Robinhood has recently revamped the feature, calling it a “cash management program” instead. Misgivings about its trustworthiness remain, however.
4. Opaque Business Model
Out of all of its recent issues, Robinhood’s overall opaque business model remains a hot point of contention between its supportive users and its critical detractors.
Specifically, questions still remain regarding precisely how Robinhood, the company, makes its money.
Many of these questions began to coalesce back in fall 2018, when several critical media reports on Robinhood’s recent SEC filings found that it made far more than its competitors from so-called “high-frequency traders” at a 60:1 ratio.
This eventually led to a groundswell of criticism against the manner in which Robinhood profited from payment for order flow structures.
In basic terms, a “payment for order flow” describes a method that a brokerage firm can financially profit by arranging their securities sales order to benefit a third party.
While they aren’t mutually exclusive, this practice is generally recognized as being against an investor’s best interest because it raises the chances of their shares being sold at sub-optimal prices (from the investor’s perspective, in any case).
Later in the fall, Bloomberg reported that nearly ½ of all Robinhood profits came from this problematic sales model.
Robinhood didn’t deny this and, in fact, emphasized that the nature of their profit structure was always clear in its various user agreements (both when starting and accounts and when completing trade transactions).
Even so, outsiders were quick to emphasize how such a lopsided reliance on one shaky revenue stream could quickly turn sour for users down the line.
Along the same lines, some critical observes have questioned the various internal structures that allow Robinhood to offer commission-free transactions through their platform.
More specifically, observers have been quick to note that Robinhood may well be using the same type of internally-beneficial business model in their cryptocurrency trading platform. In that domain, the discrepancy between user benefit and platform profit may be even more extreme due to the lack of regulation and acute volume of risk associated with the cryptocurrency market.
Some users have called on Robinhood to more efficiently disclose the methods in which their platform structure either benefit or work against a user’s best interest.
However, Robinhood has done little recently to lessen the heat from this ongoing issue.
5. Poor Customer Service
I don’t often use customer service in general.
I prefer to figure stuff out on my own whenever possible. I will search the internet, read FAQS, read forums etc.
However, whenever money is involved, you need to know that you are well taken care of.
On two different occasions, I have to contact Robinhood customer service and the response time was over 1 week!
That’s unexceptionable for a brokerage firm.
Apparently, I’m not the only person who experienced these issues.
Implications for Robinhood’s Future
All of these recent issues hold implications for Robinhood’s future, not only in terms of its stability but also in terms of its trustworthiness. Both are crucial for a fruitful investment experience, given that a fault in either domain can lead a depletion of the company’s resources and resulting decrease in the platform’s overall quality.
First, in terms of core services and security, Robinhood clearly has a deficit to make up. While they have been successful at getting new users in the door with its offer of commission-free trades, it hasn’t done nearly enough to support its users once they are an active community member.
The wake of the December 2018 service outages really emphasizes this, as they overcorrected their structural responses and then tried to make amends by offering free trials of their premium services.
Also, it is clear that Robinhood’s leaders need to spend a bit more time hitting the books before rolling out new features.
The debacle surrounding Robinhood’s implementation of banking features demonstrated that these leaders were either ignorant of relevant regulatory standards (which is troubling) or simply chose to ignore them in an attempt to make a market-wide splash (which would be irresponsible, at the very least).
For Robinhood, the path forward for these various issues remains murky.
While fixing an issue such as a password encryption protocol is easy enough, Robinhood will have quite another thing coming if they hope to structurally shift their presently opaque profit model.
The investment market is full of rumors, so it may only be a matter of time before rumors about Robinhood’s previous issues begin to converge and dissuade prospective users from jumping on board.
For now, those who are hesitant about adding structural risk to their investment plans may want to steer clear of Robinhood. While it is not entirely without its own value, its recent issues have revealed a bumpy road forward for this app-based brokerage platform.
A Viable (Free) Alternative
If you had your mind set on Robinhood and are now looking for a viable alternative, I would highly recommend Webull.
Webull provides an equally user-friendly platform on which to learn the capital trading market without all of the structural baggage associated with Robinhood.
Webull even provides more buying and selling options through their platform, including short selling, day trading, and penny stocks.
Also, unlike Robinhood, Webull has managed to maintain a commission-free business model that doesn’t disadvantage its users through risk-burdened selling order flows.
Webull even offers a descent degree of assurance for securities’ protection, with its clearing corporation holding a whopping $150 million insurance policy against unexpected, non-market value related losses.
In light of Robinhood’s recent mishaps and Webull’s comparative transparency and trustworthiness, it’s a no-brainer which brokerage entrust your money with.
Frequently Asked Questions
Is Robinhood Safe?
Robinhood Financial is a member of SIPC. Your cash is secured up to 250k and investments up to 500k (excluding crypto). However, that’s not the only factor you should consider.
Is Robinhood Legit?
That depends on who you ask. Some of their business practices are controversial.
Is Robinhood Checking Safe?
This is yet to be seen. It is a feature that was promised but never launched.
Are There Any Robinhood Alternatives?
Yes, I believe Webull is the best free alternative to Robinhood right now.