QUESTION: Do you know anything about the Robinhood bank and their 3% savings account?
ANSWER: Yes, had a few inquiries about them this month. They did offer a “savings” account but have since taken it off their website. Robinhood isn’t a bank, they are a low-cost brokerage firm so technically they weren’t offering a “savings account” but an actual brokerage account (SIPC insured, not FDIC insured which potentially has it’s cons if something were to happen to the health of their business). They’re looking to IPO soon so they’re trying to raise a bunch of capital. In general, I worry about the low-cost brokerages because they don’t make money on trade commissions (always commission free) so they make their money on debt (selling leverage to unsophisticated investors)- obviously not what you’re looking to get into, but I would worry about the overall stability of the business if we do see a downturn in the market (their institutional credit risk). In all cases you want to know what your assets are tied up in to receive a 3% return and Robinhood did a bad job in explaining that (return is not free, there is always some risk, and you need to know these details especially if you are SIPC insured. Regular bank accounts are FDIC insured will allows you to get your money back quicker, dollar for dollar)… Clearly the larger institutions aren’t immune to failure (Lehman, Bear Stearns, etc:) but offers that are too good to be true always cause me concern. Robinhood default chances are low, but still probably not worth the risk for the small % gains.