What Happens If Robinhood Goes Under?
If you’re concerned about Robinhood’s viability and financial strength, you have come to the right place. We have done all the research for you, and here are the answers on this fractious broker:
Robinhood’s History
Robinhood is a fairly late entrant into the brokerage world. It began in 2013 as a mobile app with zero commissions on U.S.-listed stocks and ETFs. This shocking policy disrupted the brokerage industry and forced other companies to follow suit.
For Robinhood, the commission plan worked and attracted customers. The company has steadily grown
since its founding and currently has roughly 24.8 million
funded accounts. It has added tradable assets to its menu (like options and cryptocurrencies) and
now offers website trading.
Problems at Robinhood
Robinhood has been in the news a lot since its beginning, and many of these reports have been on internal problems. For example, Robinhood was fined by industry watchdog FINRA in December of 2019 for not ensuring that traders on its platform were receiving the best price on equity orders.
Earlier the same year, in July, hackers were able to obtain some customer assets. Robinhood admitted that it had stored customer passwords incorrectly, and an extensive amount of customer data had been stolen.
Then in 2020, Robinhood was fined by the SEC for failing to properly disclose that it sells client orders to high-speed trading firms. This infraction cost Robinhood $65 million.
The list continues, but these are a few examples.
Robinhood’s Financial Performance
Robinhood went public in 2021 under the ticker symbol HOOD. This allows us to see how the company has been performing financially, because public companies must report financial performance.
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Protection of Robinhood Accounts
Robinhood is a member of the Securities Investor Protection Corporation (SIPC). This is the primary insurer of America’s securities accounts. And we do mean “securities accounts.” There is no insurance on cryptocurrency positions at Robinhood.
Every Robinhood customer gets $500,000 of protection on positions of securities from SIPC. Half of this amount can be used for uninvested cash. None of it can be used for cryptocurrencies. SIPC only guarantees the number of shares in an account and does not protect against a decline in market prices.
If SIPC coverage were ever exhausted, Robinhood also has a secondary policy through Lloyds of London. This policy is good for $10.5 million per customer, of which $1.75 million can be applied to uninvested cash. There is a house limit of $100 million. As with the SIPC policy, the policy only guarantees the number of shares in an account and does not guarantee market price.
In the event the London policy is maxed out, there is nothing left to protect a Robinhood account if securities were to go missing, which is the reason an account holder would want this type of insurance.
Securities going missing is one story. Robinhood going out of business is a completely different matter. We’ll look at this issue now.
What Happens If Robinhood Goes Out Of Business?
If Robinhood were to file for bankruptcy, there are many safeguards in place for the broker’s customers. Securities and cryptocurrencies should still be in the accounts. Those assets are the property of the account holders and not Robinhood, so they would not be subject to creditors’ claims during bankruptcy proceedings. If the assets are missing, then a crime has been committed, and the SEC and the FBI will move in. So will the available insurance policies in the case of missing securities.
A brokerage firm makes money from the assets sitting in its large treasure trove of accounts. Although the firm doesn’t own those assets, it generates revenue from them in multiple ways. If Robinhood can’t make enough money from the assets in its accounts, it could possibly go out of business at some point. If it does, another brokerage firm will most likely buy its accounts. Other firms will want these accounts because, as already mentioned, they can make money off of them.
To use an historical example, in 2016 OptionsHouse went out of business. OptionsHouse accounts were
acquired by E*Trade. All OptionsHouse accounts were sold to E*Trade and transferred to E*Trade
automatically. Former OptionsHouse customers simply logged into the E*Trade site from then on to
access their accounts. SIPC did not have to step into this situation because no securities were
missing.
To give another example, Scottrade closed its doors in 2017. Scottrade accounts were sold to Charles Schwab and transferred over at a specified time. Previous Scottrade customers logged into the Charles Schwab site from then on.
When brokerage firms go out of business, they announce when accounts will be moved and where they will be moved to.
If you don’t want to wait or don’t like the acquiring firm, it’s possible to transfer an account yourself before the automatic transfer occurs. So, for example, if you were an OptionsHouse customer but didn’t want to move your account to E*Trade, you could manually move it to Webull or Charles Schwab before the automatic move.
In the unlikely event that no brokerage firm wanted to take over Robinhood accounts, it would be possible to move an account out of Robinhood to another broker via the ACATS network. Robinhood charges $100 for this service.
Read
Robinhood Review.
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Charles Schwab as an Alternative
If all this sounds too worrisome to you, you could move your account now to Charles Schwab. The broker
has been in business much longer than Robinhood (since 1971) and has a
larger selection of tradable
assets, including bonds, forex, futures, and mutual funds.
Although Robinhood does have the $100 outgoing transfer fee mentioned above,
Charles Schwab reimburses ACATS fees charged by other investment firms. Just hang onto your Robinhood account statement that shows the fee and be ready to submit it to Charles Schwab as proof of the charge.
To move a Robinhood account to Charles Schwab, simply open a new account with the latter firm and start the transfer on Charles Schwab’s website. Be aware that one asset that can’t be moved into Charles Schwab is cryptocurrencies.
Besides the really convenient ACATS system, a second reason you may want to adopt Charles Schwab as your Robinhood replacement is that Charles Schwab has a long history of much better customer service than Robinhood. The latter firm has had to deal with large numbers of complaints over its customer support performance during its short lifespan. Charles Schwab, on the other hand, has a good track record in customer service, and this is a major reason investors often choose Charles Schwab.
Charles Schwab also has more advanced trading tools than Robinhood.
thinkorswim is a desktop platform that far outpaces Robinhood’s website in terms of trading capability. Besides charting and order entry, there are other tools like an advanced stock screener that really help in making trading decisions.
Finally, Charles Schwab has many more account types than Robinhood, including a long list of educational, custodial, corporate, and retirement accounts.
Read
Charles Schwab Review.
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Updated on 3/11/2025.
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