Written by: Lee Sherman
You hear a lot about disruptions when a buzz-worthy new personal finance startup comes around say once a decade. In 2006, it was Mint, which made managing your personal finances both easy and free by consolidating all of your accounts within a single dashboard. In 2013 Robinhood, arrived. Robinhood’s singular innovation (and it’s a big one) is that, unlike a traditional brokerage, it allows its retail investors to invest in companies in increments smaller than a share.
Mint and Robinhood have a lot in common. They are both designed for the novice who may have put little thought into managing their finances and investments. And they are both technologically savvy platforms that rely on only the Internet and mobile apps to reduce the friction usually associated with money management. Mint makes money, not by selling its software as Intuit’s Quicken and Microsoft Money had done, but by referring users to financial products that may save them money. Unlike most brokers, Robinhood doesn’t charge commission fees.
Robinhood is built around the relatively new concept of “fractional investing”. For as little as $1, you can invest in thousands of different stocks, you choose how much you want to invest and Robinhood will convert from dollars to parts of a whole share. This approach can allow you to build a more balanced portfolio made up of pieces of different companies. Robinhood says this fractional ownership leads to lower risk. Robinhood is no longer the only one to offer this. Other startups like Stash and established firms like Charles Schwab and Fidelity all offer variations on the “stock slices” theme.
It’s true you won’t be charged commission fees. But you’ll still end up paying fees because all other fees are passed along to the user. For all the claims of market disruption, Robinhood is still regulated by the Financial Industry Regulatory Authority (FINRA) which charges a small fee for all sell orders, regardless of brokerage, and FINRA is also required to pay a Regulatory Transaction Fee to the Securities and Exchange Commission (SEC). While the rate is subject to annual and mid-year adjustments, it is currently $22.10 per $1,000,000 of principal (sells only) rounded up to the nearest penny.
You’ll need to pay a small fee, the Trading Activity Fee whenever you sell. The fee is $0.000119 per share (equity sells) and $0.002 per share (options sells). This fee is rounded up to the nearest penny and no greater than $5.95. Lastly, there are the American Depositary Receipt (ADR) fees. These are certificates that allow foreign stocks to trade on American exchanges. The banks issuing these certificates my charge custodial fees that typically range from $0.01-$0.03 per share. See Robinhood’s fee schedule for more.
Robinhood actually makes money by rounding these fees to the nearest penny and, in many cases, collecting more than it needs to pay them, pocketing the rest. With fractional shares, these fees are barely noticeable but they do add up.
While Robinhood has a lot of offer the novice investor it’s not the most-full featured trading platform out there. More established brokers or apps like Personal Capital provide better stock research tools and a more hands-on approach when you need it. Like much in life, you get what you pay for.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas. Full disclosure: Lee was an early employee at Mint and was responsible for the company’s personal finance content.