Following its launch in 2013, Robinhood quickly became a popular way of investing in stocks and exchange-traded funds (ETFs). However, it's no longer the golden boy of millennial investing. Indeed, you could even argue that Robinhood is flat-out bad.
Here are several reasons why you may not want to invest with Robinhood.
1. Free Trades Are Now Commonplace
Robinhood's big selling point used to be its commission-free structure. The free trades came at a price in other ways (some of which we'll explore shortly), but users figured that the monetary savings were worth the tradeoffs.
But Robinhood is no longer the only show in town. Since its arrival, several major brokers have followed suit and now also offer free trades. Today, you can get free trades with TD Ameritrade, Fidelity, Charles Schwab, E*TRADE, Interactive Brokers, and many more. It means you need to question whether some of Robinhood's other major shortcomings are still acceptable. In practice, they are probably not.
2. Major Downtime Problems
2020 was one of the most remarkable years in market history. We saw a record-breaking selloff and recovery, moves of more than 10 percent on a single day, and new all-time highs by the end of the year.
We don't want to go into a lesson on investing, so suffice to say that during periods of such extreme volatility, it's vital that people can access their accounts. Positions can move quickly and investors need to be able to reliably secure profits or cut losses.
It's not good, therefore, when a broker is inaccessible on some of the most volatile days of the last 50 years. But that's what happened to Robinhood. Not once. Not twice. But three times.
Worse still, all the outages occurred in the space of one week in early March during the most unpredictable days of the COVID-19 crisis. It cost people millions of dollars in positions they could not close. And Robinhood's response? A "goodwill" payment of $75. It is now facing multiple lawsuits over the issue.
Users can no longer maintain any reasonable faith in the service being available when they need it most. That alone is enough reason to switch broker.
3. Delayed Stock Quotes
If you read Robinhood's FAQs or independent reviews of the service, you will see that the app has real-time quotes.
That's only half true. Yes, your orders will always be completed at the real-time price, but the charts and data you see on screen are often delayed. This will prevent you from getting in and out of trades in the most efficient manner.
There are a few factors at play. Most notably, Robinhood uses the same provider as sites like The Motley Fool, Seeking Alpha, and StockTwits for its quotes. It's cheap, barebones, and limited to a handful of exchanges. Robinhood does this to save money.
If you have an account with another broker, open the same stock on both apps and you'll see the differences for yourself.
4. A Poor Cryptocurrency Product
We're not here to debate the merits of cryptocurrency as an investment class. But we do understand the appeal of being able to do your stock trading and crypto trading in the same place. On paper, that's something that Robinhood offers; it launched its crypto trading service in 2018.
But the crypto platform has some shocking drawbacks. The drawbacks are so severe that we'd strongly urge all users to look elsewhere for your crypto needs.
- Coin withdrawals are not available. If you own Bitcoin, you cannot transfer it out of Robinhood to your own private wallet.
- Robinhood does not supply you with access to your wallet or your wallet address.
- You do not hold the private keys for your crypto assets. An oft-repeated (and accurate) piece of advice in the crypto world is that if you don't have the private keys, you do not own the coins.
All three of these problems directly fly in the face of proper crypto security advice.
On a more simplistic level, Robinhood's selection of crypto is also extremely limited. Only seven coins are available: Bitcoin, Bitcoin Cash, Bitcoin SV, Ethereum, Dogecoin, Ethereum Classic, and Litecoin.
5. Payment for Order Flow
Given the free trades, how does Robinhood make money? Sure, there's Robinhood Gold, but the signup rate is nowhere near enough to warrant the multi-billion dollar valuation.
The answer is via a practice called payment for order flow. It means that instead of searching for the best price for a given stock, Robinhood is instead selling your data to high-frequency trading (HFT) firms for massive profit. The HFT firms add the data to their algorithms to better understand the flow of retail money. It is they who are Robinhood's real customers.
A blog post on Seeking Alpha in 2018 revealed the truth after the author spent time studying Robinhood's SEC filings:
E*TRADE makes $22 per $1,000,000 traded, which sounds like a small number until you realize they cleared $47,000,000 last quarter from this. But off an identical $1,000,000 in volume, Robinhood gets paid $260 from the same HFT firms. If Robinhood did as much trade volume as E*TRADE, they would theoretically be making close to $500 million per quarter in payments from HFT firms.
As the old saying goes: if you're not paying for the product, you are the product.
6. Robinhood Gold
And speaking of Robinhood Gold... For those who don't know, Robinhood Gold is a subscription service that introduces a few extra features for $5 per month. With this, you get:
- Margin investing.
- Access to professional research, such as Morningstar reports.
- Level II market data.
- Larger instant deposits (rather than waiting for money to clear).
Sounds reasonable. But here's the catch—any broker worth its salt will make all of that stuff available for free on its respective platform. It really isn't worth $5 per month. Robinhood Gold just feels like a way to eke more cash out of inexperienced investors who think that by subscribing they will become better traders.
They won't.
7. Poor Customer Service
Robinhood's customer support is notoriously bad. Users complain of waiting weeks for an answer in the app's Help section, lengthy queues to speak to someone on the phone, no responses to emails, and a general lack of urgency in responding to important issues.
In ordinary circumstances, poor customer service might be forgivable in a free app. However, when large sums of money are involved, clients deserve better. Given the company's value, we're sure that they could hire a few extra reps easily enough.
8. Lack of Account Types
Robinhood only offers standard, individual investing accounts. You cannot open a joint account, trust account, custodial account, Individual Retirement Account (IRA), or any other type of tax-efficient savings account. Therefore, it's not a good option if you're investing for long-term goals, for a child, or as a couple.
Ideally, you should always max out your savings in non-taxable accounts before using taxable products.
9. Lack of Investment Types
Robinhood only lets you invest in four types of assets: US exchange-listed stocks and ETFs, options contracts for US exchange-listed Stocks and ETFs, cryptocurrencies, and American Depository Receipts (ADRs) for 250 global companies.
It might sound like a lot, but you're missing out on access to many other types of investments, including over-the-counter equities, foreign stocks, mutual funds, bonds, fixed-income assets, and Forex.
Perhaps most concerning is the lack of bonds. Spreading your investment across multiple asset categories is one of the best ways to reduce risk to your portfolio, but at the very least you should hold a mix of equities and bonds.
10. Unimpressive Watchlist Features
A watchlist is a customizable list of stocks that you want to keep an eye on. They are an essential part of planning your investments; they let you quickly see whether specific parameters have been hit, and consequently, whether it's a good time to buy your desired asset.
Most brokerages' watchlists are feature-rich. For example, you can create multiple lists for different stocks, opportunities, or ideas. Normally, you can also sort your watchlist in various ways such as by price, volume, bid price, and other key indicators.
Robinhood doesn't offer any of those features. You can't even sort your list alphabetically (though at least you can reorder your list manually). The lack of watchlist features makes the app unsuitable for serious stock research.
Remember: if you don't research stocks thoroughly before purchasing, you're not investing. You're gambling.
Should You Avoid Robinhood?
Robinhood is definitely a great way for new investors to get their feet wet in the stock market.
However, it's important to know that Robinhood's free trades come at a price, and in a lot of situations Robinhood is an unsuitable investment broker.
Once you've built up some knowledge and feel confident, it's worth opening an account with a traditional discount brokerage elsewhere.