What will happen if Robinhood / M1 Finance gets acquired or pivot?

Question

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In the latest newsletter, below information was presented regarding Robinhood.

Robinhood is totally fine for fun money, but it's not a mature enough platform for the kind of investing you'd stake your future on. Here's why:

1. No reliable customer service if something goes wrong.
2. There's no way to name beneficiaries. If the TaskRabbit worker you hired to clean your dishes (do people do that?) murders you with a serving fork...your money goes into probate.
3. Apex, their clearing house, has a reputation for struggling with the basics of accounting. Tax time or doing an in-kind transfer without a capital gains hit could be fun (see #1).
4. You can't do real Tax Loss Harvesting, they only offer FIFO accounting.
5. No interest paid on cash holdings. Other brokers offer up to 2%.
6. I've heard trade execution inside bid/ask spreads can be an issue (can't confirm, but would negate the value of free trades)
7. There's a strong case they'll get bought or pivot instead of becoming the boring, safe broker you'll want to trust with your money decades from now.

I am really concerned about #7. What will happen in case Robinhood gets acquired or they pivot to something else? Are there examples from the past where this has happened? And does any one know if these points apply to M1Finance as well.

Answer 1

Robinhood is fine for the small investor who wants to minimize the effect of commissions (elsewhere) on a small portfolio and whose needs are minimal, if not absent (research, charting, fast execution and reporting, etc.). If you need more than a stripped down platform, you need to look elsewhere.

Another issue to add to your list is that RH receives Payment For Order Flow which means that they receive a small payment from a market maker for sending orders to them. From what I have read, RH denies this in their FAQs list but it's clearly spelled out in their quarterly financial statement. It's about $2.50 per $10,000. In the second quarter, 100% of their trades were sent to Apex Clearing, Citadel, Two Sigma, Wolverine, and Virtu. They also received about $0.50 per option contract. You might feel that $2.50 or $0.50 is small change and isn't coming out of your pocket but a good broker provides ECN rebates to the customer (some ECNs pay for execution that arose from adding liquidity).

As for your concern with #7, brokerage firms are bought out all of the time. Nothing to see there. If RH gets acquired or pivots, several things might happen. New ownership might keep things as they are or perhaps they start charging commissions. I doubt the latter will occur since their attractiveness is geared to and based on the appeal to Millenials with small accounts and those investors might run if this was implemented. Perhaps when they get much, much larger but I doubt that they will rock that boat until then, if at all. And if they convert to a Fool Service Broker or even a conventional discount broker with additional services, and you're unhappy with the new implementation, you can always ACAT transfer your account to another broker. RH has SIPC insurance so the only issue is fees, services and convenience.

Answer 2

Personally, I have no idea why anyone would trust Robinhood for their brokerage account. I understand that people (probably young people) think an "investing app" is a thing and that may appeal to some people. With that said, I think most of those enumerated points aren't even the problem.

For starters, if you don't have much money you shouldn't be buying individual companies unless you are fully aware of the risks. So the fact that there is no fee/commission to buy part of a share of Tesla or Netflix or whatever isn't a benefit because you shouldn't be doing that.

I'd venture that 90% of Robinhood's customers would be WAY better served by a big discount broker and a low fee total market mutual fund. Put your $25 in to a 0.04% fund for no fee and no commission. And the interest rate, Schwab pays me 10 basis points. If you need interest on your cash throw it in the money market account.

For point #7, I had an account at Zecco (which used Apex and there was never a problem with anything) it was acquired by TradeKing which has now been acquired by Ally. Robinhood will probably be acquired, when that happens it will probably inherit a new fee structure. It happens. But it's not a reason to not use Robinhood. I simply think the "move fast break stuff" silicon valley start-up ethos isn't properly conducive to investing. And young people with a negative net worth shouldn't be buying 0.06 of a share of Tesla.

Answer 3

Hm?

2: Seriously? I do not havea beneficiary named for my bank accounts either. There is this thing named a last will that then gets executed and it deals with all posessions you have - or in default someone inherits if if somoene is there.

3: may be, but they are still a licensed clearing house, or? As in: checked.

4: You can do whatever accounting you want.

5: Ah, no. Not outside of advertisings. Why would they pay for your money to lie around when they earn no money with it (because banks do NOT really pay interest).

6: So, they are not a trading broker. Surprise. Many are not. Want a special HFT broker, open an account with them,

7: Seriously, so a reason not to use them is that maybe you have to move to anotehr broker? SERIOUSPY? DECADES from now? Oh man.

You really make up reasons here.