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.”