Concerns about Robinhood

Barron’s ran a story this weekend on Robinhood. Robinhood is a new free online trading platform that is targeting millennials. The concept of Robinhood is a good one: provide basic online financial advice and free trading to help (mostly younger) people get started in saving and investing for retirement. That said, there are elements of Robinhood that raise some concerns. First, lest one be fooled by its name, Robinhood is hardly altruistic. It gets paid primarily by order flow. The platform encourages a high volume of trading which is a conflict of interest and may not be a good thing for long-term savers/investors. Second, the platform may be encouraging many people who have no experience in investing to make risky bets on stocks about which they know very little. This has some overtones reminiscent of the dot com bubble of the late 1990s and may imply increasing frothiness in the stock market. Despite advancements in technology, investment fundamentals have not changed: it is important to understand what you own and understand how to manage risk in portfolios.