Robinhood 3-year anniversary review: I love it, but it’s terrible

I just glanced at my Robinhood app and realized that I joined on January 8, 2016, which made yesterday my third anniversary of using the app. That seems like as good an opportunity as ever to take stock and share my overall impressions so far.

The company seems perfectly scrupulous

Robinhood attracted a lot of damaging, well-deserved publicity last month for the botched launch of their “checking and savings” product, but it’s worth pointing out the product never launched and they never accepted any money from anyone under false pretenses (or any pretenses at all). No one got “ripped off,” although some wags have speculated it may have been a deliberate stunt to acquire customer data on the cheap. If so, that would be a shame, but hardly unprecedented in the world of venture capital.

Besides that hiccup, after 3 years using the app I’m constantly impressed by how well their technology works, in a field as bespoke and arcane as securities. To give a simple example: back in November, 2016, I owned three shares of EWU (the iShares MSCI United Kingdom Index Fund), which underwent a 2-1 reverse stock split. I suddenly saw my shares drop from 3 to 1, and shot them a note asking how the odd share would be handled. They replied a few hours later saying the odd share would be paid out in cash in 2-4 weeks, and it was. This is not a difficult or complicated transaction — it happens millions of times every year. But it was a transaction that Robinhood had thought of and had a system for dealing with.

To give a slightly more complicated example, in 2016 I owned 20 shares of Seagate Technologies. As is my custom, I placed a limit sell order to take advantage of any price spikes. My limit order happened to be at $26.13. But when the markets opened on July 12, 2016, the price didn’t just spike, it leapt. Since Robinhood knew my limit price, they could have picked off my order and then immediately sold it at the higher opening price. This would have been illegal, but so is falsifying mortgage documents and that’s never stopped anyone. Instead, Robinhood executed my order at the opening price of $27.47, 5% higher than the price they knew I was willing to sell at.

Operating in a scrupulous way may sound like a low bar, but it’s a bar much larger, more profitable firms fail to clear on a daily basis, so the fact Robinhood meets that standard shouldn’t be shrugged off.

Robinhood did two and a half innovative things no one talks about

Robinhood gets a lot of credit for their commission-free trades — everyone knows about that. What fewer people mention are two genuine innovations (plus one expensive gimmick) they introduced with little or no fanfare:

• real-time quotes. Those of you young enough to remember looking at early implementations of online brokerages no doubt remember that publicly available quotes were always accompanied by the stern admonition that “prices may be delayed by 15 minutes.” My primitive understanding is that the delay on the public feeds allowed exchanges to sell real-time information to those willing to pay for them. Robinhood simply made real-time prices available to everyone, whether or not they actually invested money with Robinhood.
• commission-free options trading. Unlike real-time prices, this is genuinely unique to the best of my knowledge. I’ve never traded options, and I don’t think you should trade options unless you have some inside knowledge it would be illegal to trade on, but if you do have some reason to want to trade options, being able to make those trades without paying a commission is obviously superior to the alternative.
• fixed-cost margin loans. Robinhood also made margin trading more widely available by offering fixed-cost margin loans. These loans are not a good deal if you’re a professional trader because lower rates are available at other brokerages, but like Robinhood’s  commission-free options trades, if you have some kind of trading edge you may be interested in borrowing money at relatively low rates in order to maximize your upside.

Robinhood cannot be your primary brokerage

As all the foregoing should attest, I love Robinhood, I use Robinhood every day, and I’m glad it exists. But it does not and cannot play any significant role in the brokerage space until they fix some fundamental flaws.

First, they don’t support retirement accounts. There is no logical reason why anyone should be investing in taxable stocks or ETF’s until their workplace retirement accounts and Individual Retirement Accounts have had their contributions maximized. In this sense, Robinhood puts the cart before the horse, allowing individual investors to make small investments in individual stocks and bonds they could also make through a tax-advantaged retirement account (Vanguard now allows most ETF’s to be traded commission free).

Second, they don’t support mutual funds. ETF’s are great for taxable accounts under certain circumstances, but even if you want to make taxable investments, it doesn’t make any sense to completely exclude mutual funds from your universe of investible securities. That means any mutual funds you want to hold need to be purchased in a different account with a different brokerage. That’s not an insurmountable obstacle, it just means you need to continue to use other brokerage accounts alongside your Robinhood account.

Finally, until Robinhood implements three changes, it will never be anything more than a stunt, as much fun as it is:

• allow specific identification of shares for sale;
• track unrealized and realized gains;
• and integrate a sensible way of tracking running gains and losses.

A brief note on the third point. When I open my Robinhood app, I see that since I joined the service 3 years ago, I’ve earned a return of $264.37, or 220.22%. My problem is that I have no idea what that means, and it’s not explained anywhere inside the app. Is it the current balance in my account divided by the initial balance in my account, which would have no connection to the performance of any of my investments? Does it take dividends into account? Does it take into account both realized and unrealized gains, only the first, or only the second?

When it comes to tax documents, I’m sure Robinhood prepares them as scrupulously as it handles all its other operations. But I don’t want to consult my tax documents. I want to consult the app I use to do my gambling, and Robinhood has simply decided to make that information as difficult as possible to access and use. Compare that to Vanguard’s super-primitive website and app, which nevertheless allow you to break down your account balance by contribution/withdrawal, investment income, and capital gains. 

Conclusion

Among a certain breed of venture capitalists, Robinhood is considered an exciting new business that is going to revolutionize the investment landscape. It may revolutionize the landscape, but it will never make a lasting impression as long as it’s offering something for free that costs money to provide. That doesn’t mean it won’t be around in 10, 50, or 100 years. It may well be purchased as the investment interface for Bank of America, Chase, Fidelity, or Charles Schwab.

But as scrupulous as the company has proven to be so far, the American investment landscape is too firmly shaped by the tax treatment of investment returns for a firm that offers only taxable brokerage accounts to be of much interest to anyone but gamblers. If Robinhood was intended as a proof of concept, the concept has been proven and they should look for a buyer. If it’s intended to operate as an independent brokerage for the foreseeable future, they need to get their act together, and implement the kind of concrete improvements I described here as soon as possible so they can attract the amount of capital it will require to start earning a profit.

Finally, let me be clear, I don’t have a horse in this race: I like Robinhood, I’ll use Robinhood as long as it exists, and if it goes out of business I’ll stop using it. After all, I’ve got checking, savings, brokerage, and retirement accounts all over the place. But since Robinhood is so bad at explaining its own operations, I felt the least I could do is give new users the lay of the land: if you want to invest with Robinhood, think of it as the dessert you earn after you’ve already eaten the vegetables of low-cost, tax-advantaged retirement savings accounts.