What Happens If Robinhood Goes Bankrupt?

Robinhood Financial is a fairly safe broker to trade with, but you may be wondering what would happen to your account in the unlikely event where they had to file for bankruptcy. Before we go down that path, we recommend you read our article on Robinhood’s safety if you haven’t already, so that you are aware of how and to what extent their customers’ accounts are insured and protected against a company downfall.


What is Bankruptcy?

Bankruptcy is a legal status that a company can enter when it finds itself in a condition of severe financial hardship with no foreseeable way out, usually as a result of deteriorating business revenues. The company is unable to meet its debt obligations or sufficiently fund its daily activities, and so it is left with little choice but to file for bankruptcy – either Chapter 7 or 11. Chapter 7 bankruptcy is when the company ceases all operations and goes out of business completely, while Chapter 11 is a bit less severe because the court gives the company some additional flexibility in meeting its debt obligations while allowing them to attempt to restructure the firm and restore its financial health.


What Is SIPC Protection?

The Securities Investor Protection Corporation (SIPC) is a self-governing, non-profit, federally-mandated organization that enacts securities regulation for the U.S. financial services industry to protect consumers. U.S. brokers, including Robinhood, are required to be members of the SIPC. One of the SIPC’s primary responsibilities is to oversee bankruptcy proceedings for brokers to ensure the customers’ assets are protected to the fullest extent of the law.


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How Would Robinhood Handle a Bankruptcy?

If Robinhood Financial was ever in a situation where it wasn’t taking in enough cash to meet its obligations it could be forced to file for bankruptcy, which introduces the risk that they wouldn’t have enough money to cover all or some of your account balance. Luckily, Robinhood is a member of the Securities Investor Protection Corporation (SIPC), and so you would have some protection as a Robinhood account holder. The SIPC insures up to $500,000 of each Robinhood customer’s account, including up to $250,000 in cash.

This means that any cash balance over $250,000 in your Robinhood account would not be protected and could potentially be lost if the broker went under. Some brokers pay for additional protection on their clients’ account balances so that greater amounts are insured, but Robinhood doesn’t have any additional insurance at this time. The value of the stocks and bonds in your Robinhood account wouldn’t be affected by any potential bankruptcy as another mission of the SIPC is to protect these assets during bankruptcy.

We should note that if you have a Robinhood Crypto account this is not included under their SIPC protection. This means that 100% of whatever balances you might haven in the crypto account could potentially be lost and not recovered during a bankruptcy.


How Does This Impact Their New Cash Management Service?

You may have also heard that Robinhood is planning to unveil a cash management service in early 2019. This was initially marketed as a Robinhood checking or savings account with an attractive 3% interest rate, however after the FDIC reminded Robinhood that they are not legally a bank (and would therefore not qualify for FDIC insurance) they stopped branding it as a checking account. Any cash balances in this service would therefore not be FDIC insured.

It’s also not clear if these cash balances would be insured by the SIPC since the SIPC protects cash that is deposited with a brokerage firm for one purpose – to use in purchasing securities. This is likely something that Robinhood is still hammering out the details on prior to its launch, but this is an important detail you should pay attention to when they do unveil the cash management. If it’s neither insured by FDIC nor SIPC and Robinhood goes bankrupt you could potentially lose 100% of any cash you deposited into this product.


Comparison

Firstrade charges $0 per stock and ETF transaction, which obviously is the same as Robinhood. But Firstrade provides mutual funds, excellent website, on-line chat, and longer customer service hours. Firstrade also has a history of more satisfied customers and fewer complaints, for obvious reasons. For most investors, Firstrade is the better value.

Robinhood does not offer automatic investing or robo-advisor. M1 Finance provides both of these services and also charges $0 commission on all transactions.

TD Ameritrade offers much better trading tools than Robinhood, and there is no charge for any of them. Thinkorswim is TD Ameritrade’s flagship desktop system, and it offers many professional-level features, such as exotic technical studies and futures trading. TD Ameritrade provides three mobile apps, all with different functions. Charting on all of them is much better than Robinhood’s app can provide.


Is Robinhood Legitimate Conclusion

Although Robinhood is a very popular and quickly growing brokerage platform, it’s important to remember that newer firms are also more at risk of financial trouble than their more established counterparts. While we don’t think Robinhood is at risk of going bankrupt anytime soon, such a situation would expose its customers to very real risk. And this risk is somewhat greater than it is with other brokers since Robinhood only has the limited SIPC insurance and doesn’t offer any additional protection above the SIPC limits.


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