Is Robinhood Safe?

Whenever there is a new broker entering the market, it’s natural to want to evaluate it against a more rigorous set of standards than you would normally use, especially if that broker is offering free trades. The new guy hasn’t been around long enough for their brand to automatically convey stability and legitimacy, like the TD Ameritrades or Vanguards of the investing world, and so an extra degree of caution is warranted. Robinhood, although not brand new, is a relatively new entrant in this space that has quickly become very popular, and this article will aim to address any safety concerns you may have.


Robinhood’s BBB (Better Business Bureau) Rating

We searched the Better Business Bureau’s website and found Robinhood’s profile was created in September 2019. Their current rating is a B and they only have one star out of five due to four poor customer reviews. We don’t give too much weight to this rating yet since the profile was just recently created and only a handful of people have left reviews so far. We’d expect they will receive more reviews and a broader consensus as time goes on. See all the details on Better Business Bureau website.


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Is Robinhood SIPC Insured?

The Securities Investor Protection Corporation (SIPC) is a non-profit, federally-mandated, self-governing organization of which all U.S. brokers must be members. The SIPC provides insurance coverage to investors’ brokerage accounts for up to $500,000, half of which can be used to cover cash balances, in case the broker fails.

Robinhood is a broker and member of the SIPC, and therefore Robinhood accounts fall under this protection. It’s important to note, however, that Robinhood Crypto accounts are not SIPC insured and therefore don’t qualify for this protection.


Is Robinhood FDIC Insured?

The Federal Deposit Insurance Corporation (FDIC) is a federal agency that insures consumers’ bank deposits in the case that their bank fails and cannot honor client withdrawals. Robinhood is not a bank and therefore it is not FDIC insured. The broker is launching Robinhood Savings but it will have SIPC insurance instead of FDIC.

You may also be aware of Robinhood’s new “cash management” service that they plan to unveil in 2019, which is said to offer an attractive 3% interest rate. It’s important to highlight that this service is not called a “checking” or “savings” account because legally Robinhood is not a bank and cannot offer these products. You could still park your cash in this product and earn 3%, however you must remember that this cash wouldn’t be FDIC insured and therefore you could lose all of it in the event Robinhood fails. This is exactly the risk that you would be compensated for with the higher interest rate.


Is Robinhood Regulated by FINRA and the SEC?

The Financial Industry Regulatory Authority (FINRA) is a non-profit self-regulating organization tasked with protecting investors and the integrity of the financial markets through enacting effective broker regulations. Like most U.S. brokers, Robinhood is a member of FINRA, and their FINRA license number (or CRD number) is 165998.

Robinhood’s FINRA profile shows zero disclosures, which is a good sign. It also shows that the company was formed as an LLC in Delaware, but operates out of Menlo Park, California. This is pretty common, as many companies incorporate in the state of Delaware for advantageous tax treatment, but actually conduct their operations from another state.

Robinhood is also registered with the U.S. Securities and Exchange Commission (SEC), which is effective in all 50 U.S. states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The SEC is a federal agency that is responsible for legal oversight and enforcement of laws and regulations in the U.S. financial services industry.


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Robinhood’s Founders and CEOs

The company was founded by Vladimir Tenev and Baiju Bhatt, who previously designed high-frequency trading algorithms for firms in New York. Vladimir and Baiju met at Stanford University, where they were both students. They started Robinhood in 2013, and became billionaires as the company reached a $6billion valuation after a May 2019 round of funding. Both co-founders are still leading Robinhood as co-CEOs.


Is Robinhood Legitimate Conclusion

There is nothing to suggest that Robinhood is not a legitimate broker or that it is inherently unsafe for investors. They offer a very popular product (zero commission trades), which we think is an attractive platform for many investors.

As an investor, your account is automatically insured by the SIPC up to $500,000 ($250,000 in cash) in the event Robinhood goes bankrupt. It’s important to be aware of the limitation of this protection though, as some brokers purchase additional insurance for their customers above the $500,000, but Robinhood does not.


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Robinhood Safety reviewed by TopRatedFirms.com Rating: 4