Robinhood Markets has made plenty of headlines in 2020, not all of them good. Nonetheless, it has attracted a flood of new retail investors who have opened up millions of new accounts since the onset of the coronavirus outbreak.

While much of the investing universe has shifted to passive, automated and otherwise hands-off methods and strategies, the popularity of Robinhood, a commission-free stock trading mobile app, is opening some eyes. “For me, there are more positive things than negative about Robinhood, and I’m actually a big fan of all robo-advisors and anything that drives greater innovations or greater access,” says Brent Weiss, co-founder of digitally driven investment and advice provider Facet Wealth. “The big story here is the democratization of financial advice.”

Now boasting more than 13 million user accounts through this year’s second quarter, Robinhood closed a $660 million funding round in late September that valued it at $11.7 billion.

Weiss believes that Robinhood is primarily a force for democratizing investing. With no account minimums and fractional share stock investing, users can average into a basket of stocks for a handful of dollars at a time.

The investing app says that half of its new users this year have been first-time investors, and the average age of its user is 31. But Robinhood is also seen as a potentially dangerous and problematic platform. It places sophisticated tools like options and cryptocurrencies just a few clicks and swipes away from most users, and the guidance on how to use these more complex securities isn’t easy to find.

“I object to the easy availability of options trading,” says Weiss. “The vast majority of Americans were not trained in the ways of personal finance or quality investing for their financial futures. I could go into Robinhood and with two clicks—answering two easy questions about whether I’m capable of doing this—I have access to an incredibly risky tool in my toolbox.”

TradeZero, another commission-free trading platform offering users access to fractional shares, options, margin and the ability to short stocks, is after a more sophisticated level of investor than Robinhood, says founder Dan Pipitone. TradeZero, which has seen a 300% spike in monthly and daily trading volume during the outbreak and what Pipitone calls an “exponential” increase in new accounts, places stricter limits on access to its more sophisticated capabilities.

“Access is not robo-approved on TradeZero,” Pipitone says. “We don’t open margin to account holders less than 21 years old. We don’t want to be synonymous with a dating app where you can just swipe up to trade.”

TradeZero monitors user activity, says Pipitone, and if it doesn’t match with what a user has told the app about their risk preferences and goals, the company will intervene with some mitigation.

Robinhood also adds behavioral encouragement and gamification to investing—after making a trade with a swipe, users are sent a congratulatory message complete with animated confetti or fireworks.

An additional behavioral risk has been created by success—millions of new users have experienced only an up market since the March lows, and they may have an inflated opinion of their own abilities, Weiss says. “A lot of people don’t understand that while they feel like they’re winning, they’re not actually being successful. My friends don’t understand that. They’re not sure how to gauge the potential future earnings of companies like Southwest, Disney and the cruise lines. They’re celebrating that Southwest went up 10% from the bottom but didn’t realize that the S&P 500 completely recovered its losses in the same amount of time.”

Earlier this year, a college-aged man committed suicide after misinterpreting what the platform was telling him and assuming that he had realized a loss of $700,000. That suicide gained the attention of lawmakers.

Robinhood does offer some investment education. It runs a podcast that boasts two million monthly listeners and publishes a newsletter with more than 20 million subscribers. “They’re not overtly encouraging high-risk trading behavior,” says Kim Muhota, vice president in the financial services practice of global management consultant SSA & Company. “By virtue of the fact that their platform is really easy to use, it tends to encourage people to plunge in faster.”

Since Robinhood’s users tend to be young, inexperienced and low-information investors, they’re assumed to be more prone to mistakes. At TradeZero, Pipitone says there are more steps to be taken before an investor can use margin or short stocks.

There are signs that Robinhood’s customers are trading more. The New York Times reported that the app’s users traded 40 times as many stock shares and 88 times as many options contracts as Charles Schwab customers.

Weiss also points out that users likely have better uses for $5,000—about the average size of an account—than stock picking. “As a financial planner, I think about what the opportunity cost is in investing via a service like Robinhood. That’s a concern for me.”

Thus far, regulators have been more interested in Robinhood’s policy of selling users’ order flow to high-frequency traders to support its commission-free service, investigating allegations that the platform did not fully inform its users about how it derives revenue. Many brokerages sell order flow as a source of revenue, says Pipitone, and TradeZero does as well, but not to the extent Robinhood does.

Muhota did not see Robinhood’s revenue sources as an issue for the platform. “A lot of fintechs work with third parties to execute transactions, and they will only focus on the front end of executing that transaction. So far, there hasn’t been anything wrong with that kind of revenue model,” he says.

In Front Of Regulations, For Now
Currently, most fintech investment platforms are exempt from federal fiduciary regulations. Because Robinhood avoids making specific investment recommendations, it is not considered a fiduciary. By contrast, Facet Wealth chose to register as an investment advisor and provide digitally driven personal financial advice to down-market clients. Robinhood, on the other hand, is subject to a lower level of scrutiny than robo-advisors and many other digital wealth platforms.

But that may change, says Weiss. “I do think there needs to be some level of expectation, some statement that tells people, ‘This is what you’re getting out of this app,’” Weiss says. “That will help educate consumers on whether this is something good for their financial landscape.”

One thing that might be illuminated is Robinhood’s possible conflict of interest: The more it encourages its users to trade through behavioral nudges, the more revenue it generates.

Muhota feels that fintechs will face growing fiduciary risks in the future. “Innovation is way ahead of the curve relative to regulations, and regulators need time to catch up,” he says. “I think at some point the regulatory burden over a platform like Robinhood will continue to get more stringent; especially if there are more incidents of consumers losing money from a lack of control, you’ll see Finra and other regulators pay closer attention.”

But Pipitone describes fiduciary risk as just “another layer of scrutiny and liability” that fintechs can adjust to over time.

Robinhood’s ability to continue its remarkable growth into the future may depend on its ability to manage these risks. Muhota says that may mean the platform has to add more guidance, or an advice component, for its users.

“There may eventually be a degree of training wheels that you’ll have to put on something as powerful as a Robinhood,” he says. “Especially for a segment that doesn’t have deep experience in investing.”

At some point, he argues, Robinhood’s streamlined user experience will not be unique anymore—as companies like Fidelity, Schwab and E*TRADE adopt commission-free trading, fractional shares and mobile investing applications of their own and Robinhood faces increased competition from applications with similar functions like TradeZero and Revolut.

What Young People Want
Instead, Robinhood will have to work to cultivate its dedicated following of young investors in order to remain relevant as it approaches a potential public offering or exit transaction. Young investors’ attraction to the platform may show their fatigue with passive index investing after a wild ride through Covid-19’s volatility. Or it may show that smaller investors in general have a tremendous appetite for active stock picking that was not being met.

“Young people are thinking differently about the future,” Weiss says. “It’s not just are you investing in mutual funds and ETFs. There’s a segment asking about cryptocurrencies, individual securities and accounts they can control. I have a good number of clients who have a small portion of their money in Robinhood accounts because they actually enjoy investing.”

Weiss believes that advisors need to be open to clients who wish to hold a portion of their money away on platforms like Robinhood for some self-directed investing. And if young people are feeling more affinity with active, self-directed investing, advisors will have to adapt.

“Advisors need to be creative,” says Pipitone. “Their value add needs to be packaged in new and different ways if they want these millions of newer entrants into the market to one day understand the value of having a managed account.”

Despite its shortcomings, Robinhood may signal to the financial services industry that there’s an emerging trend in consumer preferences, Muhota says. “The real learning opportunity is zeroing in on what it is about Robinhood that attracts the Gen X, Y and Z investor, and determining how you can apply them to your own platforms,” Muhota says. “I think consumers are disaggregating the way they think about their relationship with financial providers—they want specialized user experiences in their financial lives and to access pure-play specialists who own their space. A 50-, 55-year old investor might want all their transactions with just one player, but the younger generation is more interested in a powerful user experience.”