“If It’s Too Good to Be True…” Inconvenient Facts about Robinhood and Fees
Updated: Mar 13
The trading app Robinhood.com has been in the news recently, especially in connection with the price feud in GameStop shares between hedge fund short sellers and individual investors. The app, which prominently advertises itself as a provider of “Investing for Everyone” because of its “commission-free” trades, was one of the principal platforms used by individual investors—mostly fans of GameStop—to purchase shares of the company, thus bidding up the price and causing some uncomfortable moments for the hedge fund managers who were shorting the stock.
Robinhood is designed to appeal to small investors and especially younger individuals because it allows purchases of fractional shares—fifteen dollars’ worth of Apple, for example: a stock currently selling at $121 per share—and touts the fact that trades are free to investors. The platform also facilitates the purchase and sale of stock options and cryptocurrency, which also holds appeal to a younger generation. Additionally, the app utilizes gaming-type experiences to create an environment that encourages frequent buying and selling. After all, trades are “free,” so why not take advantage?
But what Robinhood wasn't saying was that it paid for the “free” trades by auctioning them off to the highest bidder, effectively guaranteeing that its customers paid the highest possible price for purchases and received the lowest possible price for sales. Because none of this was being disclosed to users of the platform, Robinhood recently paid a $65 million fine to the Securities and Exchange Commission (SEC) to settle charges that it was failing in its duty to provide “best execution” of trades for its clients. According to the SEC, Robinhood customers collectively paid some $34 million more in trading costs than they would have by using a conventional brokerage service and paying its fees.
For many of us, this latest incident brings to mind the proverb, “If it’s too good to be true, it probably isn’t.” Especially for the uninformed whose principal source of information about the financial markets and investing consists of headlines glimpsed on their smart phones, the allure of “free trades,” “no minimum purchase,” and a chance to “get in on the action” can prove both hard to resist and needlessly expensive.
That’s why it is so important, where your most important financial plans are concerned, to have trustworthy advice from a knowledgeable professional advisor who is duty-bound to act only in your best interest. This type of fiduciary responsibility means, among other things, that the advisor is required to obtain the best possible terms for execution of any trades in client accounts and also to clearly disclose, in writing, how they are being paid for providing financial advice and services.
As fiduciary, fee-only financial planners and advisors, we are ethically and professionally bound to provide advice and recommendations that place our clients’ best interests before everything else, including our own benefit. To learn more about why this matters for your financial plans, click here to read our recent article, “The Value of Good Advice—And How to Tell if You’re Getting It.” And if we can answer other questions or provide assistance, don’t hesitate to contact us.