Last updated on August 6th, 2022 at 10:40 pm
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Robinhood is one of the most popular trading apps out there and has been for a long time. However, recent controversies have made many people question their business practices and methods.
But is that worry justified, and is Robinhood a trustworthy broker?
Despite the controversy surrounding Robinhood, it is a trustworthy online broker and is entirely safe to use. With that said, some financial advisors have expressed concerns over the apps’ design and language, which can seem misleading to some people.
This article will focus on Robinhood and how trustworthy it is for investors. You will also learn about some of the major points of criticism it has received in recent years and how they have affected how they do business.
Robinhood Popularity And Credentials
With more than 31 million users, Robinhood is one of the most popular investment apps in the world. It is currently only available for U.S. citizens and U.S. visa holders.
But it has plans to expand to the U.K. and Australia in the near future.
Robinhood is regulated by the SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Authority) and is registered with the SEC.
Additionally, your money in Robinhood is protected by the SIPC (Securities Investor Protection Corporation), which can cover up to $250,000 in cash or up to $500,000 for securities. In other words, the vast majority of investors have nothing to worry about.
Selling User Data Controversy
Towards the end of 2018, news outlets started reporting that almost half of Robinhood’s revenue comes from Payment For Order Flow (PFOF). Soon after, Robinhood confirmed these claims in an interview with CNBC.
A year later, Robinhood was fined $1.25 million by FINRA for failing to ensure that their customers got the best price for orders.
In reality, many brokerages, including popular ones like Schwab and T.D. Ameritrade are selling their customers’ orders data to market makers, who make money from the spread between the ask and bid price.
Is It A Problem?
While Robinhood has garnered the most criticism for its PFOF practices, this is not unique to them. The biggest reason why Robinhood faced the biggest clashback is that they failed to disclose that a large portion of their revenue comes from PFOF, resulting in a lawsuit filed in the San Francisco federal court in December 2020.
The biggest problem is that Robinhood reportedly makes significantly more from PFOF than their rivals. Considering that PFOF is an unpopular practice banned in some countries, including the U.K. and Australia, that is certainly not a good look.
Is Robinhood Safe To Use?
When you’re using Robinhood or any other investment app for that matter, you have to provide your personal details, including your income, social security number, and other information. So, keeping that information safe is crucial for a brokerage like Robinhood.
Robinhood ensures that all passwords and sensitive user information are encrypted with top-notch security protocols, and will only access banking information upon opening the account to verify it. For added security protection, Robinhood also offers two-factor and third-party authentication mechanisms.
All in all, Robinhood is a very safe investment app to use, but you should do your best not to get caught up in the fact that trading is free and make unnecessary moves that will lose you money.
Always do thorough research on the companies you want to invest in.
Misleading Language And App Design
With its simple design, trading on Robinhood is very beginner-friendly as it’s easy to navigate and quickly buy or sell positions.
However, many critics argue that this is a major flaw as traders are shown limited information, along with somewhat misleading language or lack of information on their site.
Some critics claim that Robinhood is trying to gamify investing. In March 2021, the company decided to remove their confetti animation, which triggered during a customer’s first trade, or first referral, amid public scrutiny.
At the end of 2020, the SEC fined Robinhood $65 million for misleading customers about their primary revenue sources. The company failed to keep its word on making the best possible trades for customers and exchanged their orders for money with trading firms.
This lasted from 2015 to 2018.
Robinhood made a statement on the settlement, mentioning that those historical practices don’t represent the brokerage’s current state and are continually trying to evolve and make trading a more enjoyable experience for their customers.
What Customers Say About Robinhood
Robinhood is mainly popular with young investors, as the average user age is around 26 years old.
After the controversy in late 2020 and early 2021, investors massively left the platform and transferred their funds to other brokers. Many of them also flooded to review sites where they left poor reviews about the investment app.
On the other hand, with investing becoming more and more popular, Robinhood has also gained many new customers, especially in the weeks and months following the Gamestop fiasco.
While the public opinion about Robinhood has undoubtedly gone downhill within the last few years, millions of customers still use Robinhood every day, and most are happy with the platform.
The general consensus among customers is that Robinhood is a reliable broker that makes investing easy and safe, but there are also things that they can improve such as their charts, and other information about securities.
Robinhood has faced plenty of controversies in recent years, with many experts and regular traders criticizing their business practices. In general, though, the company is still a very trustworthy broker and is one of the easiest ways for new investors to enter the market.
The criticism they received forced Robinhood to make positive changes in their business practices, becoming more transparent with customers and improving the app, which has helped them remain a popular online broker.
However, one worrying sign is a large number of negative reviews in recent times, mainly stemming from all the public backlash the company has faced.