By MyPerfectFinancialAdvisor
We have written a number of articles cautioning investors about the downsides of things that seem to be free, but in reality, are not. Of the several articles we have published about Robinhood, our most recent piece covered their prior scandal of client accounts being hacked and not providing any phone number for victims to call for help, but we also touched on inadequate policies allowing unsophisticated investors access to strategies beyond their capabilities.
Last week, the Securities and Exchange Commission fined Robinhood $65 million dollars for failing to disclose money made from payments they received from brokerages that Robinhood directs business to. These payments actually cost investors in that they did not get the best price for their purchase or sale.
Just one day prior, the State of Massachusetts sued Robinhood for using gaming tactics to manipulate investors to trade more, such as colorful confetti graphics when a trade is completed. The more trades Robinhood completes, the greater their revenue increases from brokerage payments. “They are interested in expanding their market base, not serving their investors” says William Galvin, Secretary of the Commonwealth of Massachusetts.
Shockingly, 68% of the Robinhood customers in Massachusetts approved for options trading have no or little investing experience, per the complaint from the state. Over the past year we have written about the dangers of firms like Robinhood when they make investing appear like a game, including the incredibly sad account of the young, inexperienced investor who committed suicide after incurring huge investment losses.
The Lessons to Be Learned:
- There is no “free lunch”: When firms advertise a free service, look hard to find out how they make money. If you cannot quickly read how exactly they make money, be cautious.
- Free/low trading costs are not everything: You do get what you pay for, and free trading is no exception. Be thoughtful in what you are giving up when the trade is free.
- The securities industry is complex: There are many ways to get expert advice, even in small increments so there is no need for an investor to go it alone completely.
- Investing is not a game: Spending your hard-earned money, regardless of the amount, can have ramifications. Fast growing firms run by young managers with slick marketing can pull you in to take greater risk than you should.
We have always applauded the high-level mission of Robinhood and others to make investing available to more investors at every income level. However, truly educating the investor, turning away customers when necessary and protecting investors from themselves has been a hallmark of the best financial services firms. Robinhood clearly does not yet understand such standards, but investors can learn from these major problems and turn to firms that do understand the gravity and importance of financial services.
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