I try not to be negative about products or services that are “good but not perfect.” Knocking something that’s a step in the right direction doesn’t serve the greater cause. I used to consider Robinhood to be in this category. Not my choice of brokerage, but a net positive for getting new investors interested and involved. But based on recent events, I think it’s time to speak up about the negatives of investing with Robinhood.
Before I get into the bad, let’s talk about what’s great about Robinhood:
- Free Trades. You can’t talk about Robinhood without acknowledging what they did for lowering fees in the brokerage industry. Before Robinhood entered the market, you basically had to pay money every time you wanted to buy or sell a stock or ETF. Typical prices were $5 to $20 per trade. Robinhood entered and staked their business model on free trades. When the legacy brokerages started to feel the threat, they all followed suit, and now it’s free to trade stocks and ETFs on basically every major online brokerage (in the US… non US brokerages aren’t on this free trade bandwagon yet).
- Great User Experience. I give credit to Robinhood for making it easy to get started investing. They tempt you with a free stock. The app is easy to download and use. You’re off to the races trading in minutes. It makes “investing” feel accessible to young investors in a way the old stodgy brokerage websites do not. They deserve credit for making it attractive and accessible to get started, and moving some young people from the “not an investor” to the “investor” columns of the world. That’s a significant shift.
Well, it can’t all be sugar and spice. I have some serious reservations about using Robinhood as a brokerage.
- No Roth IRAs. Robinhood basically only offers one type of account: A taxable brokerage account. Based on the demographic of Robinhood users and how most of them are young, likely lower income earners, it’s almost criminal to suggest they invest inside of a brokerage account before they’ve taken advantage of the massively beneficial tax break offered by a Roth IRA. Their website mentions they “hope to” in the future, but who knows.
- No Other Accounts. In addition to IRAs, they don’t offer joint accounts, trust accounts, custodial accounts, HSAs, 401ks, 529s, ESAs, credit cards, etc. As you progress through your investing career you’ll likely end up using most of these. (I use almost all of them inside my Fidelity account).
- Focus on Trading. From the marketing, to the hype, to the “free stock”, you’re tempted with for signing up, Robinhood seems to be all about trading and speculation. Anecdotally, every Robinhood