Is Robinhood Safe?
Are you worried about the safety of your investments? Let's examine the security features of Robinhood to determine if it's a reliable choice. Read on.
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Robinhood has become a go-to choice for many investors because of its user-friendly interface and commission-free trading.
But when it comes to safety, you may have some concerns. What did Robinhood do after the 2021 data breach and system failure?
In this article, let's take a look at how secure Robinhood is. Let's examine its regulatory affiliations and privacy protocols. This way, you can decide if you feel comfortable using Robinhood as your trading platform.
Is Robinhood Safe for Investors?
Robinhood is considered a safe trading platform. It is registered with trusted institutions such as the SEC, FINRA, and SIPC.
But that's not all! Robinhood has gone the extra mile to improve security and customer support. It implemented fraud screening procedures. This has enabled Robinhood to catch any unauthorized trading.
So when considering Robinhood as your trading platform, it's important to understand how some rules and regulations work together to safeguard your investments. Let's take a closer look at the details.
Yes, Robinhood Gold is safe & legit. Among its features is a high-interest yield on your uninvested brokerage cash through the cash sweep program. [1]
Robinhood Gold: 5% APY on Idle Cash
- 5.00% APY on idle cash - earn while you sleep
- Your money is FDIC-insured up to $2.25M at partner banks. No cap on earnings, withdraw or invest you money at any time.
1% Boost with Robinhood Gold
Gold members get a 1% boost on their net new, eligible brokerage deposits. Boost is divided into 24 monthly payouts. To earn your full boost, hold or invest your brokerage deposits for 2 years. If you cancel Gold, you'll lose future payouts you haven't earned yet. Boost only applies to net new, eligible deposits.
3% Match on IRA with Robinhood Gold
Earn 3% IRA match on all eligible contributions with Robinhood Gold. Terms and conditions apply. This is a limited-time offer.
Robinhood Safety Measures
Here are the data privacy and protection safety measures employed by Robinhood. You can also check out their SEC and FINRA compliance, along with the added security of SIPC and FDIC insurance (for uninvested cash through FDIC-insured program banks).
Cybersecurity Measures
Data protection and privacy is one of Robinhood's top priorities. They are committed to safeguarding their users' sensitive information by implementing robust security measures. Here are some:
- Data encryption
To safeguard sensitive information, such as Social Security numbers, Robinhood encrypts this data before storing it. Encryption involves encoding the information into a secure secret code that can only be accessed by authorized parties.Robinhood uses a special system called Transport Layer Security (TLS).[2] TLS makes sure that when you use their app or website, any information you send to their servers stays private. Examples are your passwords or bank account details.
Is it safe to give your SSN to Robinhood?
While Robinhood uses encryption to protect your data, including your SSN, you should still be cautious and research before sharing sensitive information online. - Password Security
When you create a password for your account, Robinhood uses a special scrambling method called hashing. It's putting your password through a secret code blender that makes it hard for anyone to figure out what it is.Your passwords are not stored as plain text. So even if someone were to get access to its systems, they wouldn't be able to read or understand your password.
- Two-factor Authentication (2FA)
Robinhood employs two-factor authentication (2FA) as an added layer of security for user accounts. So when you log in or make changes to your account, it requires two pieces of information to confirm your identity.How does 2FA work?
First, you enter your password (something you know). And then, a unique code or request approval is sent to your trusted device (something you have). This way, even if someone manages to get hold of your password, they won't be able to access your account without the additional verification.Robinhood automatically enables 2FA for new devices to make sure it's you trying to sign in. It helps ensure that unauthorized people can't access your account.
Regulatory Oversight
Robinhood abides by the rules and regulations of the Security and Exchange Commission and Financial Industry Regulatory Authority.
- Security and Exchange Commission (SEC) Regulation
The SEC's role is to ensure that Robinhood acts appropriately as a broker and a public company.Robinhood is required to follow the rules and regulations set by the SEC. This includes submitting reports to the SEC every year. If Robinhood violates these rules, the SEC may impose fines or other penalties.
- Financial Industry Regulatory Authority (FINRA) Membership
FINRA is a regulatory group that oversees brokerage platforms such as Robinhood. FINRA assures the platform's compliance with rules and regulations related to trading securities, like stocks and bonds.It also regulates the individuals who advise or guide clients regarding securities transactions. So, being a member of FINRA is an added oversight for both the platform and the people involved.
Yes, Robinhood reports your trading income and losses from the app to the IRS. So, it's important that you also report your investment taxes accurately and on time to avoid any penalties.
Insurance Coverage
Your investments and other assets with Robinhood are insured under SIPC for your stocks and FDIC for your uninvested cash (through a cash sweep to FDIC-insured program banks). Let's explore how this coverage works to provide additional protection for your funds.
- Securities Investor Protection Corporation (SIPC)
Robinhood Financial LLC and Robinhood Securities, LLC are part of a group that protects your stocks and other securities investments. This group is called the Securities Investor Protection Corporation (SIPC). Basically, if something goes wrong and your investments are at risk, SIPC steps in to provide some level of protection.SIPC covers your securities (like stock) up to $500,000 which includes cash claims up to $250,000.[3] So you're generally covered if you have stock or other securities worth less than $500,000.And Robinhood added another safeguard. It purchased an additional insurance policy to supplement the SIPC coverage. This extra insurance applies if the SIPC limits are reached. It provides additional protection for your securities and cash, up to $1 billion.[4]
Overall, Robinhood is taking steps to provide additional protection beyond what SIPC offers. It's a way to give you peace of mind that your investments are safe.
Take note of these limits in the insurance:- It can only give you a maximum return of $50 million in securities including $1.9 million in cash. So if you have investments worth more than those amounts, you might not be fully covered for the excess.
- It's also important to note that this extra insurance doesn't protect you if your investments' value drops due to market changes. It's more focused on protecting you from certain risks related to the custody of your assets.
- It can only give you a maximum return of $50 million in securities including $1.9 million in cash. So if you have investments worth more than those amounts, you might not be fully covered for the excess.
- FDIC Insurance
The main goal of FDIC insurance is to protect your uninvested cash to the best extent possible.In its cash sweep program, Robinhood deposits your unspent, or uninvested cash, in certain banks. This way, your money is safe and eligible for insurance coverage.
Under this program, the Federal Deposit Insurance Corporation (FDIC) can insure your uninvested cash for up to $2 million.
However, please keep in mind that there are certain limits to how much the FDIC and banks can insure.Each bank in the program can provide coverage of up to $250,000, including any deposits you already have in that bank under the same ownership.While each bank can insure up to $250,000, a small portion of that amount, specifically $2,000, is set aside for any interest that may have accrued on your cash. So the actual insurance coverage for your cash might be slightly lower.
Also, if you opt out of one or more of the program banks, it could affect the amount of FDIC insurance coverage you have. So make sure to consider that if you want to change your participation in the cash sweep program.
Is my money safe with Robinhood?
Robinhood's membership in FINRA safeguards your uninvested funds on the platform, while its membership in SIPC provides security for your invested money.[5] However, there are limitations to these protections. Reviewing Robinhood's rules and regulations regarding these securities is recommended.
Customer Support and Reviews
The customer feedback Robinhood receives on various consumer review platforms is mostly unfavorable. The majority of the reviews Robinhood received are 1-star out of 5 stars on platforms like Trustpilot[6], Better Business Bureau[7], and Consumer Affairs.[8]
One of the most common negative feedback points is that their live customer support is unreachable. However, you should also consider that when money is involved, customers can get quite emotional and thus easily leave negative reviews.
But if you need help with your trading experience on Robinhood, their 24/7 customer support can help answer your questions.[9]
- Chat: Available on their platform 24/7
- Phone: Available from 7 a.m. to 9 p.m. ET (Mon - Fri)
Here are the contact numbers if you have specific concerns:
- Robinhood Crypto or Spending account: 888-275-8523
- Robinhood Support: 650-761-7789
If you still have concerns, you can reach Robinhood's support through this link. Just make sure you're logged in first.
Risks in Using Robinhood
Robinhood popularized commission-free stock trading and plans to democratize finance. By making it easy to trade, it has become a go-to broker among retail traders, especially for beginners.
However, it has its own fair share of issues—from data breaches to platform outages. Continue reading.
Best Execution Violations
On Dec. 19, 2019, FINRA fined Robinhood $1.25 million for best execution violations. This is related to its payment-for-order-flow process, which allows it to offer no-commission trades.[10]
From Oct. 2016 to Nov. 2017, Robinhood failed to have a decent supervisory system. It didn't conduct regular and rigorous reviews to ensure that trades placed by customers were executed at the best or most favorable price possible.
As part of the settlement, Robinhood hired an independent consultant to review its processes and ensure best execution.
Why it matters: Even if there's no commission, by getting the worst price instead of the best price, you're basically not getting the most out of your money when you trade.
GameStop (GME) Stock Saga
In January 2021, the users of the wallstreetbets subreddit initiated a short squeeze on GameStop and other stocks.
What started as an act of rebellion against short-selling institutions ended up pumping the price of GME to record highs in just a week. Ultimately, Robinhood and other brokers had to block the buy button for GME and other related stocks on Jan. 28, 2021.[11]
Robinhood temporarily blocked buy orders due to the margin call they received from the National Securities Clearing Corporation (NSCC). If they didn't, Robinhood would have had to pay an additional $3 billion, an amount they didn't have, as collateral.[12]
Because of this, the only option for the traders was to exit their positions. Of course, that didn't bode well with retail traders who were hoping to earn more from the volatility on that day.[13]
Why it matters: While Robinhood is a decent broker normally, the GameStop saga tested its capacity and resiliency as a broker during extremely volatile and high-volume market scenarios.
Highest FINRA Penalty
In June 2021, FINRA penalized Robinhood with a record-breaking levy of $70 million for three reasons: false and misleading trading information, system outages, and a lax eligibility check for options trading.[14]
FINRA found that Robinhood had a history of showing the wrong trading information on its platform. This includes data on margin, buying power or "negative buying power," margin calls, and risk of loss for option trades.
Robinhood also failed to exercise due diligence when providing options trading access to its customers. Options are complex and are not appropriate for all. Yet, some Robinhood traders easily gained access to options trading because the eligibility check was left to algorithms and approval bots with little oversight.
From 2018 to late 2020, Robinhood users experienced multiple system outages and critical system failures. Even during the historic market volatility on March 2-3, 2020, Robinhood's website and mobile app went down and traders couldn't access their accounts to manage their positions.
Lastly, Robinhood failed to report to FINRA the tens of thousands of written complaints that it was required to report.
Why it matters: FINRA giving Robinhood the highest penalty in history just shows the gravity of the violations they made as a broker. By trying to "gamify" trading or investing, it compromised important controls in their processes, which can be a non-negotiable issue for serious traders.
Data Breach Incident
In November 2021, hackers got hold of a list of Robinhood users. It included email addresses for about 5 million people and names for around 2 million people. Robinhood found out that some of the entries in the list have phone numbers, and there are other bits of information in the list that they're still looking into.
But here's the important part: Robinhood is confident that the list didn't have any Social Security numbers, bank account numbers, or debit card numbers. So, customers haven't suffered any financial losses because of this incident.
Why it matters: Brokers must have the necessary security measures to prevent information leaks to protect your money.
Robinhood experienced a data breach in late 2021, where millions of email addresses, names, and other sensitive information were compromised. After the incident, Robinhood updated its systems to enhance data privacy and security measures.
Alternatives to Robinhood
If you're not satisfied with Robinhood's security measures, you may check out other options such as the ones listed below.
- eToro
eToro is a popular social trading platform that allows users to trade a variety of assets, including stock, cryptocurrencies, commodities, and more.One of its unique features is the ability to engage in social trading, where users can see and even automatically copy the trades of successful investors. This feature allows novice traders to learn from experienced traders and potentially replicate their strategies.
eToro also offers a user-friendly interface, a wide range of educational resources, and a virtual trading feature for practice.
- Webull
Webull is an online brokerage platform with advanced trading tools and features. It provides commission-free trading for stock, ETFs, and options.Webull's unique features include real-time market data, customizable charts, technical analysis indicators, and the ability to trade on margin. It also has extended trading hours. It allows users to trade before and after regular market hours.
Active traders and those interested in in-depth market analysis often prefer Webull.
- Fidelity
Fidelity is a well-established brokerage firm that offers a wide range of investment options and services. It provides access to stocks, mutual funds, ETFs, bonds, and more.Fidelity is known for its research and educational resources, helping investors make informed decisions. The platform offers a user-friendly interface, advanced trading tools, retirement planning tools, and access to professional investment advice.
Take note that the features and services offered by these platforms may change over time.
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Bottom Line
When evaluating the safety of Robinhood, it is essential to consider several factors. These include cybersecurity measures and regulatory oversight.
To keep user data safe, Robinhood uses encryption. Its SIPC membership also ensures protection for the invested funds. However, you must still stay cautious when sharing sensitive information online and research any platform before investing.
Robinhood Gold: 5% APY on Idle Cash
- 5.00% APY on idle cash - earn while you sleep
- Your money is FDIC-insured up to $2.25M at partner banks. No cap on earnings, withdraw or invest you money at any time.
1% Boost with Robinhood Gold
Gold members get a 1% boost on their net new, eligible brokerage deposits. Boost is divided into 24 monthly payouts. To earn your full boost, hold or invest your brokerage deposits for 2 years. If you cancel Gold, you'll lose future payouts you haven't earned yet. Boost only applies to net new, eligible deposits.
3% Match on IRA with Robinhood Gold
Earn 3% IRA match on all eligible contributions with Robinhood Gold. Terms and conditions apply. This is a limited-time offer.
Recent data breaches show that no platform is completely free from security risks. Reviewing Robinhood's rules, regulations, and security measures is wise. Or you may consider other brokerage platforms. These can help you make an informed decision about your investments.
Finally, talking with a financial advisor can provide personalized guidance based on your unique needs and circumstances.
References
- ^ Robinhood. What's Robinhood Gold?, Retrieved 12/05/2024
- ^ Robinhood. How you're protected, Retrieved 12/23/2024
- ^ SIPC. What SIPC Protects, Retrieved 12/23/2024
- ^ Robinhood. How you're protected, Retrieved 12/23/2024
- ^ Robinhood. Brokerage cash sweep program interest rate (APY), Retrieved 12/23/2024
- ^ Trustpilot. Robinhood, Retrieved 12/05/2024
- ^ BBB. Robinhood, Retrieved 12/05/2024
- ^ Consumer Affairs. Robinhood, Retrieved 12/05/2024
- ^ Robinhood. How to contact support, Retrieved 12/05/2024
- ^ FINRA. FINRA Fines Robinhood Financial, LLC $1.25 Million for Best Execution Violations, Retrieved 12/05/2024
- ^ SEC. Staff Report on Equity and Options Market Structure Conditions in Early 2021, Retrieved 12/05/2024
- ^ Yahoo Finance. The real story behind Robinhood's decision to restrict GameStop trading—and that 4 a.m. call to put up $3 billion, Retrieved 12/05/2024
- ^ Yahoo Finance. Robinhood and others halt buying of GameStop and other hot stocks, infuriating users, Retrieved 12/05/2024
- ^ FINRA. Firm Ordered to Pay Approximately $70 Million for Systemic Supervisory Failures and Significant Harm Suffered by Millions of Customers, Retrieved 12/05/2024
- ^ CNN. Robinhood settles lawsuit over 20-year-old trader who died by suicide, Retrieved 12/05/2024
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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
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