Robinhood has turned the investing world upside down as a mobile-only brokerage offering no commissions, trading fees, or account minimums. Since December 2014, millions of investors have decided to invest with Robinhood.
In many Robinhood reviews, we’ve seen how convenient it is to access the financial markets via the app. The simplest way to describe Robinhood is as the Uber of the investing world.
It also runs a premium trading platform called Robinhood Gold, which comes with a $5 monthly fee. Robinhood Gold enables you to trade on margin, make bigger deposits, and access Level II market data.
All this leads us to the question, “Is Robinhood legit?”
Is Robinhood Regulated with the SEC?
The Securities and Exchange Commission (SEC) regulates all brokerage firms that deal in securities. The whole point of the SEC is to ensure brokerages play fairly and guarantee a minimum level of transparency.
The SEC’s primary compliance mechanism is to prosecute civil cases against those who commit insider trading, release false market data, and commit financial fraud.
Although most Robinhood reviews talk about SEC protection, this is a matter of regulating companies. There are no protections for the individual investor.
The SEC will not insure you against losses, regardless of your brokerage’s actions.
Whenever evaluating a brokerage firm, you need to go beyond SEC protection to ensure you and your money are protected.
Does Robinhood Hold Membership with FINRA?
The Financial Industry Regulatory Authority (FINRA) is a self-regulating organization overseen by the SEC. Unlike the SEC, FINRA is not a government body.
Most brokerages voluntarily sign up to FINRA, but they’re not obligated. Robinhood is a member of FINRA, therefore, abides by all its rules and regulations.
FINRA’s purpose is to provide testing and licensing to brokerages and individual agents. Through this transparent disclosure organization, investors have limited protections against rogue brokers.
When asking, “Is Robinhood safe?” FINRA protection is something you should prioritize.
Is My Money Insured with Robinhood?
Many reviews on Robinhood made it clear that your money is protected through the Securities Investor Protection Corporation (SIPC). The SIPC is a nonprofit that protects the funds held by investors if a brokerage files for bankruptcy or experiences other financial difficulties.
The SIPC has existed since 1970 and was created by an act of Congress. However, the SIPC provides no regulation. It exists solely to restore investor funds if a brokerage goes under.
As of this writing, if Robinhood goes bankrupt or misappropriates your funds, you’ll get back $500,000 in securities and up to $250,000 in cash. Anything more than these amounts is uninsured.
Most investors will find that Robinhood’s insurance is more than enough to cover their portfolios.
Robinhood Excess of SIPC
Before you start thinking that Robinhood isn’t suitable for larger investors or those looking for a place to store their retirement funds, there’s also “excess of SIPC” to consider.
Robinhood has gone further than most brokerages by developing a relationship with Lloyd’s of London.
In practice, this means that after your SIPC protections have been exhausted, you’ll get up to $1.5 million in cash covered and $10 million in securities. Unless you’re one of the wealthiest 1% of Americans, everything you have in your Robinhood portfolio is fully covered.
So, is Robinhood legit? Absolutely.
Is Robinhood the Safest Place to Invest Your Money?
Understand that Robinhood is a rudimentary investment app. It doesn’t have the same controls as other low-cost investing apps, such as M1 Finance, SoFi Invest, or Betterment. Even traditional brokerages have far more innovative apps to help you manage your portfolio and make informed investing decisions.
Managing a diversified portfolio with Robinhood can be difficult. Tracking more than three or four positions can be near impossible. Plus, it’s hard to maintain diversification since the platform doesn’t offer bonds and mutual funds.
Finally, you cannot integrate Robinhood with popular financial management platforms, such as Quicken and Mint. Tracking and managing your holdings as part of a broader financial strategy is far from simple when you use Robinhood.
But what does this have to do with judging the safety of Robinhood?
Simple. Managing, researching, and investing becomes more complex, leading novice investors to make the wrong decisions.
Robinhood Outages and Interruptions
One of the biggest reasons people ask, “Is Robinhood legit?” comes down to an imposed interruption on GameStop stock.
Back in January 2021, the GameStop Short Squeeze was in full swing, and the share price soared. Robinhood reacted by placing strict limits on trading, which stopped the rise in its tracks. It led to outrage and multiple lawsuits being leveled against the company.
Although multiple lawsuits were dismissed in Federal court, many of the more serious cases are still ongoing.
It’s not the first time Robinhood has found itself in hot water. Due to execution violations between 2016 and 2017, FINRA fined Robinhood $1.25 million, a relatively light penalty historically.
These issues don’t make Robinhood unsafe, but they are a warning to day traders attempting to take advantage of highly volatile markets. Many investors who were burned during the GameStop saga have come out and said they would never trust this brokerage again.
Is Robinhood Safe for Investors?
Robinhood has gone through some questionable sagas in recent years. Since the platform launched so recently, it has never tackled a severe market downturn on the level of 2008. While this might make some investors nervous, it shouldn’t bother the majority.
The fact is that Robinhood investing goes above and beyond what’s necessary by not only having SIPC protection for your money but excess SIPC protection.
Regardless of any actions Robinhood may or may not take in the future, your money is safe. In the worst-case scenario, you may have to wait a little time for the legal mechanisms to work and begin refunding investor money. But you will get your money.
We believe that Robinhood offers a decent investing platform. Still, we recommend comparing it with platforms like M1 Finance vs. Robinhood and Betterment vs. Robinhood to help you make the right decision.