Why Robinhood Is Bad

Why Robinhood Is Bad – 5 Reasons To Consider

Robinhood is one of the most well-known brokers out there. This is mostly because of their no-commission trading offer. In addition to that, the technology-focused design and user experience of the app attract a lot of Millenials and younger generations to the world of investing. Since I have used Robinhood myself, I wanted to point out a few things to keep in mind before you start investing on their platform. So, why is Robinhood so bad?

Why Robinhood is bad: Robinhood is bad because it incentivizes day-trading and gambling. This can be especially detrimental to younger and less experienced investors who are taking their first steps into the world of investing. With no resources and an arcade-like user interface, Robinhood gamifies the investing experience. And this is the real problem with Robinhood. Blurring the lines between gambling and investing.

Of course, as most things in life, Robinhood is not 100% bad. Let’s first have a look at some the reasons people like Robinhood.

The Good

Of course, the main thing that appears attractive about Robinhood is the commission-free buying and selling of stocks. And admittedly, this one of Robinhood’s best features. Even big brokerage firms with tons of liquidity and access to all sorts of tech solutions have been able (or willing) to achieve this.

This low (or non-existent) cost to entry into the world of investing has lured in a lot of youthful investors. And per se, that is not a bad thing. Increasing financial literacy among the youth and generally educating people about their investment options has a lot of upsides.

So, what’s so bad about that, you may ask. Why is Robinhood bad? What’s the catch?

As one Reddit user put it: “The catch is once it turns you into a degenerate gambler, you end up paying for Robinhood Gold.” — SOGorman35

And I could not have said it any better. This statement sums up pretty much everything that is wrong and bad about Robinhood. Let’s have a closer look!

the Bad

Here are some of downsides of Robinhood that are more on the technical level and aren’t deal-breakers to me. These are kind of your nice-to-have features:

It’s woefully slow

There is a meme going around the internet world. And as overused as it may be it seems to be at least partly accurate.

Post image
source

The truth is, server speed and general bugs and glitches in the Robinhood app are among the most frequent user compaints. This can be especially devastating for day-trader or scalpers who rely on accurate pricing and timely trade execution. Not that you should be scalping, but I thought I’d mention this as it might affect other parts of the user experience as well.

Zero resources

Another thing that Robinhood lacks pretty much entirely is the ability to research before investing. As a prudent investor you will want to do your proper due diligence before investing. This includes looking at a company’s balance sheet, dividend distribution and historical performance.

Unfortunately, none of these options are available to you as an investor at Robinhood since there are close to zero resources available on the app. The only thing you will find there is a oddly misconstrued price chart:

Add-on fees

Robinhood is known for its no-fee trading. Besides that there is also no account management fee. However, once you look closely there is a hidden fee for many of the “extra” services Robinhood offers that are usually simply included in most other brokerages.

If you solely use Robinhood for buying and selling stocks these might not be a big deal to you, but they are something you should be aware of:

Some of the “hidden” fees include $75 for transferring your account to another broker. They just don’t want you to leave. Also if you wish to receive your statements in paper format, that will be an extra 5 bucks per piece. (Who uses paper anyway, right?).

A fee that could be more relevant is that for trading a foreign, meaning non-U.S., security. They charge for this varies anywhere from $15 up to $50 per transaction(!).

Inability to select a beneficiary on your account

Usually a standard feature with any other broker will be the option to add a beneficiary to your account such as your spouse. This is an added security feature in case you will be unable to access your funds at any given point in time.

However, this simple feature is utterly lacking at Robinhood.

and the Ugly

Now, we’ll get to some the aspect of Robinhood which make it a really bad choice for any investor with a long-term goal. These make Robinhood a less than ideal choice, despite its enticing appearance and design.

The feel of gambling

This is the big one. Confetti when you place a trade. Swiping up and own for confirmations. Incentivizing bad investing practices.

Nudging investors into the direction of placing multiple trades a day could be considered a morally ambiguous business practice. Especially considering that their key demographic are millennials and younger.

As the quote I mentioned earlier rightfully points out: the main catch is the danger of running down a rabbit hole of quick wins and dopamine shots.

You shouldn’t be day-trading anyway

Let’s talk for a second about day-trading. I have some of the reason why I believe Robinhood is a bad choice for most investors but have not explained the most obvious one. In order to understand creating a casino-like atmosphere in the world of investing is so harmful, we have to understand the difference between investing and speculating.

"The individual investor should act consistently as an investor and not as a speculator."
- Ben Graham

Speculating is solely based on price. You hope that the price of a certain asset will rise so you can sell it later at a higher price to someone else. This is also known as the great-fool-theory and can be witnessed quite vividly with Bitcoin.

Investing on the other hand is “one which, upon thorough analysis, promises safety of principal and a satisfactory return” to quote Benjamin Graham once again.

You are the product

I have examined a lot of reasons why Robinhood is bad, but none the above come even close to the betrayal of this last one. When there are no fees, and if the product is free, you probably are the product.

In fact, Robinhood sells all trading data to high-frequency trading institutions before each trade is executed. This way the high-frequency trading institution is able to buy the exact same security right before you and subsequently sell it back to you at a slightly higher price.

Of course, Robinhood does not want you to know this and banks on the fact that most investors will be so thrilled by the option to place trades without commission that they won’t notice or care about their data side-hustle. And it has worked so far!

Conclusion

Not everything about Robinhood is bad. They have certainly opened up the world of investing to an entirely new demographic and perhaps even reinstated some enthusiasm by gamifying the entire experience.

With these positives come a lot of features and and lack of features to be very wary of. Most notably the incentives for high-frequency trading and data-selling practices are an ugly price to pay for a placing a few free trades here and there.

If you are looking for a broker that combines the long-term approach of portfolio investing with modern technology I’d suggest you take a close look at M1 Finance. Not only have they managed to mold a user-friendly portfolio dashboard that is easy to navigate and a pleasure to use, they have also made it easy to focus on the long-term and focus on your financial independence.

Leave a Reply