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Thursday, Jun 13, 2024

Is Robinhood safe? Experts weigh in on using the commission-free investing app

Is Robinhood safe? Experts weigh in on using the commission-free investing app

Robinhood is an app and web interface that allows users to buy, sell, trade, and invest in stocks and other investments (like cryptocurrency) without paying commission fees.

According to Douglas Boneparth, a certified financial planner and the president of the investment advising company Bone Fide Wealth, Robinhood is "geared toward the next generation of investors."

Yet that forward focus has led to the company being investigated for "gamifying" investing. The company is facing active lawsuits and increased regulatory scrutiny, in part because it restricted trading during the GameStop stock saga in 2021.

Robinhood's rise has been rocky, leading many to wonder whether it's safe to use.

The short answer? "Trade at your own risk," Boneparth says.


Is Robinhood safe?


When setting up an account with Robinhood, users give their personal information — such as their age, net worth, income, and Social Security number. According to Nickolas Sanchez, a certified financial planner at Financial Architects, this is an entirely normal process to trade stocks under SEC guidelines.

"This isn't a Robinhood-specific requirement," he says. "If you want to invest, even at the most reputable firms, you are going to have to give underlying personal information."

The Securities and Exchange Commission requires these details to avoid fraud and especially risky investments. And just like any other brokerage firm, Robinhood must abide by the fair practice regulations set by the SEC, including providing proof of fair dealings. Otherwise, they face being hit with fines or civil lawsuits.

Additionally, Robinhood is a member of the Securities Investor Protection Corporation, which offers financial protection if a brokerage firm were to fail. The SIPC can replace up to $500,000 for both securities and cash, including a $250,000 limit for cash only, in missing customer property.

So if Robinhood went bankrupt, as an investor on that brokerage platform, your funds could be transferred to another brokerage firm or refunded to you. But investments in cryptocurrency are not protected by either the SIPC or Robinhood.

Finally, Robinhood ensures its users that their passwords and "sensitive details" are encrypted. Once you verify your banking information, Robinhood says it will "never access them again." The app also offers two-factor authentication via SMS text message and third-party authentication apps for additional security protection.


The risks of using Robinhood to buy, sell, and trade stocks


Anyone can sign up and create a trading account with Robinhood within minutes, without any real training on the stock market or educational resources on how investing works. That, according to Boneparth, may be a disservice to its users.

The financial expert pointed to the case of 20-year-old Alexander Kearns, who died by suicide after thinking he lost $730,000 on Robinhood.

"Sure, Robinhood will tell you if you go to their website they have blogs and articles about investing, but that's no different than any other brokerage," Boneparth says. "At the end of the day, Robinhood is a business. They don't have a fiduciary obligation to their clients. They facilitate a service."

He adds that there are no risks specifically inherent to Robinhood's platform, yet advises his clients to bounce investment ideas off their personal investment advisor.

Sanchez agrees, telling Insider that the minimalistic design of the app, coupled with the commission-free trading feature, may "incentivize a lot of activity," which could pose a risk to one's portfolio.

"One school of thought is that the best approach to investing — and there's really no right answer — is to buy and hold stocks in quality companies that you believe in, that you trust, and that you use," Sanchez says.


The bottom line


In short, Robinhood is safe to use, but don't get caught up by the allure of free trading. Treat Robinhood like any other broker, and be careful with how you spend your money.

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