Last Updated: 7/2/2021
Robinhood is an online trading platform where you can purchase stocks, ETFs, options, and even cryptocurrencies. Many investors use this service due to the trades being completely free. But is this actually the case? In today’s article, I’ll answer that question.
Robinhood promotes itself as a free trading platform. This means that you don’t pay any fees on your trades. Or do you?
While the trade itself is technically free, you may not be getting the best price for the stock you are purchasing. This is due to the way that Robinhood makes money. They make money in different ways, but there is one way that I want to highlight today – it’s known as order flow.
Whenever you purchase a stock, Robinhood sends that order to other brokers who in turn pay Robinhood a finder’s fee. In short, this means that since a 3rd party is now involved, this will raise the price per share of the stock you are buying.
For example, if a stock is being sold for $25 on other platforms, Robinhood may charge you $25.05. In the grand scheme of things, the impact is very minimal to the average investor. But if you are trading a lot of money the fees could add up in a hurry.
Furthermore, it’s not so much that the fees are excessive, it’s that they are hidden. And while the trades are technically free, you are still paying fees and this creates a sense of false advertising. I personally hate it when companies do things like this – fee structures should be completely transparent.
At B.E.S.T. Wealth Management, we charge far more than Robinhood does, but we also provide a much different service that is grounded in financial planning and investment management. And while our fees are higher, we don’t shy away from them; they are completely transparent on our website for everyone to see.
Should You Avoid Robinhood?
Does this mean you should not invest with Robinhood? No, but it does mean that you need to be aware of the fee structure. I’ve never personally used Robinhood, but from what I’ve read there are many things that I don’t like – lack of fee transparency, no dividend reinvestment, higher purchase prices per share, can’t open an IRA account (or a trust or joint account), etc.
For a good overview of Robinhood’s pros and cons, check out this article on Investopedia.
One of the biggest negatives of Robinhood is the recent outages customers have experienced.
One was when when the coronavirus pandemic caused the stock market to decline rapidly. Imagine how furious customers were when they couldn’t access their accounts during that record breaking stock market decline!!!
There are strategic opportunities that become available during times like those, but Robinhood investors were out of luck. We did not experience any outages for our customers and were able to make tax-savings and investment improvements that clients will be able to benefit from for years.
The other outage was when trading was halted during the Game Stop frenzy creating the narrative that Robinhood allowed the big fish (i.e. Wall Street, hedge funds, etc…) to trade during volatile times but halted it for the average investor. This recently came to a head when Robinhood was fined $70 million by FINRA.
Are There Other Options?
All trading platforms must make money or else they wouldn’t be in business. Before you pull the trigger on making your next trade with Robinhood, consider shopping around to see if you’re truly getting the best deal, especially now that many brokers (i.e. Charles Schwab and TD Ameritrade) now offer free trading as well.
But you must be aware that even Schwab and TD Ameritrade will still profit from you. They just do it in a different way. Schwab is technically a bank, so their primary revenue comes from lending out your cash to borrowers. TD Ameritrade, on the other hand, primarily makes its money by receiving more in interest on your cash accounts than they pay you.
Now that free trades are common place for the bigger brokerages, Robinhood has seen its advantage decline.
I hope that you’ve found this article helpful. If you’d like to receive more articles like this, then please be sure to subscribe below to receive my weekly financial tips. Also feel free to leave any comments you have.
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