Robinhood never understood what their appeal was

[edit 11/25/24: a trusted reader in the comments has the 3% cash back credit card, so it does really exist]

I’ve written a number of times about Robinhood, the free stock-and-ETF trading app, over the years, and back in March I wrote about what I described as “one of the best all-in-one financial products out there.” I was wrong, so today I want to explain both how I was wrong and why it matters.

Recap: the Robinhood Gold pitch

When I wrote that post, I described the new $5-per-month Robinhood Gold service as consisting of two unrelated components:

• a 5% APY interest rate on uninvested cash

• and a 3% cash back credit card (this product, to the best of my knowledge, still has not been launched, so set it aside for now).

Some people pointed out that this product also includes $1,000 in free margin in your investment account, but as will become clear, that is not worth nearly as much as it sounds. I would go so far as to say it is worth nothing, or less than nothing if it causes you to enroll in Robinhood Gold.

Market rates versus administered rates

My first mistake was misunderstanding how Robinhood markets the interest rates on uninvested cash, which illustrates the difference between “market” rates and what I call “administered” rates.

A “market” rate is like the one set on your credit cards or adjustable-rate mortgages: your loan agreement specifies a particular market index reported in some reputable newspaper and says you’ll pay that rate plus-or-minus an adjustment based on your down payment, credit rating, or the phases of the moon. The point being, the rate will change but it will change in a specified way known in advance: when the published market rate rises or falls.

An administered rate is set by the policy of the institution offering the investment or holding your funds. It is also subject to change, but it is set to administrative change, not mechanical or contractual change.

For example, US government Series EE savings bonds have an administered interest rate of (at least) 3.53% APY: the bond is guaranteed to pay out twice the invested amount after 20 years. If interest rates rise above 3.53% APY while you’re holding the bond, you also have the option to cash it out (with a penalty) and invest in the higher-yielding asset instead.

The rate on those bonds is administered by the US federal government, but in fact a lot of institutions work this way, normally as a way to gain customers. A bank or credit union can lose a little bit of money by paying above-market rates if their new customers also move in their lower-rate deposits or, even better, take out higher-interest loans like credit cards. This type of account is often marketed as a “Rewards” or “Kasasa” checking account, and I keep an eye on them at depositaccounts.com (although I’m sure there are other sources; I have no relationship with that website, I just use it).

Robinhood offers bad market rates, not good administered rates

In my post on Robinhood Gold I said, “The 5% APY offered on balances up to a million or so dollars of insured deposits[…]is competitive, but it’s not best-in-class; Vanguard is paying 5.28% on uninvested cash in their own brokerage’s sweep account as of today.”

But while Robinhood was advertising the Gold product as offering 5% APY, that was not true. It was just advertising its current below-market interest rate, and when interest rates went down, its below-market interest rate also went down.

This has happened twice since my post, and Robinhood has continued to misleadingly advertise the product in this way: first “earn 4.75% APY on your cash,” and now “earn 4.25% APY on your cash.”

Vanguard’s default federal money market settlement fund has a 4.58% 7-day SEC yield as of November 22, 2024. In other words, Robinhood started out earning less than Vanguard, and instead of becoming more attractive as an administered rate it has rushed ahead of them to become less attractive as a (below-)market rate.

The Robinhood Gold fee is administered

Hopefully the problem is now coming into focus: Robinhood charges a flat $5 monthly fee, but pays a fluctuating rate on uninvested cash. At a 5% APY, it takes $2,400 in uninvested cash to break even with the monthly fee. At 4.25%, it takes $2,824.

As interest rates fall and fees stay steady, it takes more and more uninvested cash to merely cover the fees on the account, before it even makes sense to start comparing interest rates.

You cannot hold both uninvested cash and use margin

The final issue, and why I didn’t bother mentioning it in my March post, is that you cannot take advantage of the free $1,000 in margin offered as a benefit of the account while also taking advantage of the interest rate offered a benefit of the account.

You can think of this in two different ways:

• the first dollar of a stock or ETF you buy always comes out of your uninvested cash;

• and the first dollar you receive when selling a stock or ETF is always used to repay your margin first before it begins to earn any interest.

Conclusion: don’t sign up for Robinhood Gold for any of their advertised benefits

I like to think that what makes this site different is that I always try to be as honest, straightforward, and accurate as possible, so lest any of my beloved readers get misled: I plan to continue paying for Robinhood Gold.

I’ve been experimenting with Robinhood extensively and have found some specific uses (unrelated to investing) which I’m not able to describe in detail right now, but which I’m happy to pay $120 per year to continue experimenting with.

What I certainly won’t be using it for is to hold my uninvested cash: cash is too valuable to hold with people whose business model is to make sure you get as little value for your money as possible.

As for investing with the account, I’ll be using $1,000 in cash and $1,000 in margin to partially or wholly offset the annual fee, as well as hold the free stocks they give me when people (very) occasionally use my personal referral link.

Quick hit: two more free options for manufacturing debit transactions

I wrote recently about some tools I use to manufacture debit card transactions in order to trigger the highest rates on rewards checking accounts (often but not exclusively marketed under the “Kasasa” brand).

Doctor of Credit then joined in the fun, noting that one of the easiest options, adding credit to your Amazon balance, has become onerous to the point of uselessness as they raised the minimum balance reload amount to $5 from the previous $1 minimum. Unless you’re a big Amazon spender, you’ll quickly end up with more money in Amazon credit than in interest.

With that in mind, I ran a few more experiments and found two more possibilities that are working for me for now. Note that individual banks and credit unions may code transactions differently so you’ll need to verify for yourself whether these meet the transaction requirements for your accounts.

Robinhood

Robinhood, the free stock- and crypto-trading app I write about occasionally, allows you to fund your cash balance using a debit card with no fee and a minimum deposit of $1. The money is immediately available in your account to withdraw or invest, as far as I can tell, and Robinhood does support fractional share ownership so you could even use this technique to drip some of your interest into the stock market, one of many ways to exercise compounding discipline.

PayPal

PayPal also allows you to add money to your balance with debit cards, again with a minimum of $1. PayPal in principle supports multiple cards per account, so you could use a single PayPal account to meet the debit requirements on more than one high-interest accounts. However, since PayPal also doesn’t have much in the way of identity verification, if you’re considering this I would personally suggest using a new PayPal account for each debit card you plan to use, so that if one account is frozen or closed it won’t necessarily impact the others you’re using.

Conclusion

Two final quick points. First, on the account I’m currently experimenting with, both Robinhood and PayPal transactions post as “signature” transactions so should count towards my qualification requirements, but that’s something that you’ll need to monitor for each of your accounts and each of your methods. No one else can do it for you and datapoints age fast in this game.

Finally, as hinted at above, with any service you’re experimenting with to manufacture transactions you need to keep in mind two parameters: how many accounts can you have, and how many cards can you link to each account? Venmo works great for my round-up savings account because it allows transactions under $1, but I can’t link additional debit cards. The Cash app and Robinhood (with their $1 minima) only allow one debit card to be linked at a time. PayPal is more flexible on the number of cards you can have linked, but many of us have horror stories about past account closures (even though mine ultimately ended with a fat settlement check).

Robinhood Gold versus Bank of America Preferred Rewards Platinum Honors

[To the reader: since I think a lot of people will be using affiliate links to sell this product, I’m not including any links, including my own referral links, in this post]

Robinhood, the online brokerage founded and aggressively marketed back when money was free, and which used that perch to make fee-free stock trading the new normal, recently announced a 3% cashback credit card, available only to its brokerage customers that pay for their “Gold” tier, which seems to currently cost $5.99 per month.

This is the rare product release which immediately had people in my real-world ambit asking, “have you seen this? What’s the catch?”

So I want to start by saying that there is no catch, and this is one of the best all-in-one financial products out there. Virtually everyone should sign up, once it’s widely available.

But that’s not especially interesting. What’s interesting is how it stacks up against the next-best product on the market: the Bank of America Preferred Rewards program, which has been the gold standard for cashback credit card rewards until now.

So, let’s take a look.

Robinhood Gold is a perfectly-designed all-in-one financial product

If you sign up for Robinhood Gold and get approved for their new credit card, then you earn 5% APY on your uninvested Robinhood balances and 3% cashback on all your credit card purchases.

Since Robinhood Gold is sold as a bundle, a lot of people are going to misunderstand that these are two entirely different products. The 5% APY offered on balances up to a million or so dollars of insured deposits (depending on how many FDIC partners they have any given week) is competitive, but it’s not best-in-class; Vanguard is paying 5.28% on uninvested cash in their own brokerage’s sweep account as of today.

Meanwhile, the 3% cashback offered by their new credit card, whenever it becomes available, is genuinely higher than any other product on the market.

So before we go further, let me repeat: most people are better off signing up for this bundle than they are doing anything else in the world of credit cards or banking.

Bank of America Preferred Rewards

It sounds funny to call such a bizarre program “simple,” but until the latest Robinhood announcement, the simplest, highest-earning cashback program has been Bank of America’s Preferred Rewards, which offers a 75% bonus on all the cashback earned on their own, non-co-branded credit cards. Since the highest unbonused earning on those cards is 1.5%, with Preferred Rewards those cards are usually said to earn 2.625% cashback on unbonused spend.

2.625% is lower than 3%, which means the new Robinhood product will earn higher rewards than one of the Bank of America cards on all unbonused spend.

Unlike paying for access to Robinhood Gold, qualifying for Preferred Rewards is an ordeal. I’m currently several months into the process of raising my average monthly balance until I qualify for their Platinum Preferred tier, upon which occasion I’ll transfer all the money back out until my next requalification period.

Breakeven points and resiliency

To calculate a breakeven point between Robinhood Gold and Bank of America Preferred Rewards, or any other cashback product, just divide the roughly $72 annual fee of Robinhood against the next best alternative.

A fee-free 2% cashback card, like the Citi Double Cash, is better for annual unbonused spend below $7,200: at that point the additional 1% paid by Robinhood matches the $72 cost of the membership.

Likewise, if you’re earning less than 5% APY on the funds held in your Bank of America accounts, or anywhere else, then you can consider the higher interest paid on your Robinhood balance to be “offsetting” the cost of the monthly fee.

This exercise is probably worth doing even if you don’t break even, for an unrelated reason: resiliency. I use resiliency to mean minimizing the downside when misfortune strikes. It’s much easier to shift between cards earning similar — although not identical! — rewards when one or more cards gets shut down. Shifting from a hotel card to an airline card to a cashback card is a much easier transition to make than shifting from rewards-earning credit cards to nothing.

Conclusion

For most people, under most circumstances, the Robinhood Gold proposition is airtight, for now. They should sign up, throw as much of their money as possible into their cash savings account, and use the card for all their purchases.

Whether an experienced travel hacker who has a range of similar cards earning similar value, or an experienced saver earning higher interest rates on the same balances, should do so is an exercise left for the reader.

Personal finance digression: Robinhood is a pretty good app

Every once in a while I take a break from blogging about travel hacking and write about whatever personal finance topics are on my mind. For the past few weeks I've been playing around with an app called Robinhood, and thought I'd share my impressions.

Robinhood is a mobile-only trading platform

I don't exactly understand why mobile-only applications are so popular at the moment, but Robinhood is a good example of one. As far as I can tell, there is no way to log into your Robinhood account on their website to view past trades, deposits, withdrawals, dividends, etc.

Fortunately, the app is pretty good! The main page of the app shows the current value of your account, including cash and the market value of all the shares you currently own. Below that, there's a newsfeed that shows headlines based on general market events and news specific to the shares you're tracking. Finally, the main page shows your current share positions and any ticker symbols you've saved for the app to track.

That latter functionality works even if you don't have any shares deposited with Robinhood. In other words, you can use the app to simply track the price of any stocks and ETF's you're interested in.

I've always been curious why most brokerages report share prices with a 20-minute delay, which doesn't seem particularly consumer-friendly. In any case, it's cool that Robinhood reports share prices in real-time.

Buried slightly deeper in the app's menus are the options to view past transactions, make deposits to and withdrawals from your Robinhood account, cancel pending orders, and all the other things you might want to do with a brokerage account. They even show you all your scheduled dividend payouts on a single screen, which I've never seen in a brokerage account before (although my experience with them is limited).

Robinhood executes commission-free trades of US stocks and ETF's

Now we come to the real point of the app: Robinhood doesn't charge any commission to buy or sell US stocks and exchange-traded funds.

Most brokerage firms will charge you $7 or more to execute simple trades. If you want to buy or sell a single share, that commission can easily dwarf any paper profits you made on the underlying security.

There's not much else to say: Robinhood doesn't charge those commissions. They do list a number of fees for trading listed foreign securities, "Euroclear," and "Canadian." Those situations haven't come up for me yet.

Robinhood makes deposits from a bank account immediately available

This is a neat gimmick: in order to get you trading as soon as possible, Robinhood makes funds available immediately when you initiate a deposit from your linked bank account.

When I initiated a purchase in my Vanguard brokerage account the other day, it took 3 or 4 days for the funds to become available and the price had already moved away from me, so I do appreciate this feature of Robinhood.

Two minor problems and one philosophical grievance

There are two things that will become immediately obvious as soon as you start using Robinhood:

• Robinhood does not service tax-advantaged accounts. You can't set up Robinhood as a traditional IRA, Roth IRA, Health Savings Account, 529 College Savings account, or any other kind of account besides a taxable brokerage account. If you're in a tax bracket where short term and long term capital gains are taxed at different rates from ordinary income, you have to be aware of what kinds of capital gains and losses you create through the app. For my sins I've already earned $15 in short term capital gains which I'm not looking forward to reporting next year.
• Robinhood's newsfeed function is not hosted natively in the app. I think the newsfeed is a sort of silly gimmick, but if a headline does catch your attention you have to wait for your mobile browser to load the website, which more often than not has a paywall keeping you from reading the article that interested you! Note to all app developers: If you're going to have a newsfeed, host the articles on your app!

Still, those are both quibbles. The real problem with Robinhood is that it makes day-trading incredibly easy, and more or less encourages its users to day-trade. It does this in two ways.

First, by not charging fees for each trade, Robinhood removes any disincentive from quickly moving in and out of stocks. Don't get me wrong: I don't think it's good that brokerages charge fees for trades. That's money customers would rather keep. But that basically bad practice does at least discourage people from buying and selling stocks based on minor price changes. It acts as a subtle encouragement to hold securities for the long term.

Second, the newsfeed is, more or less, a stream of constant headlines telling you to buy, sell, or short whatever stocks you happen to have loaded into Robinhood. Their algorithm simply shows all headlines related to your shares from a range of financial websites, blogs, and actual news sources. For ConocoPhilips, my current newsfeed shows:

• ConocoPhilips: Shorts Closing In On The Bottom
• How To Play The Growth In US Oil Exports With Fat Dividends (Part 1)
• Oil Patch: The 'Circle The Drain' Phase Begins
• Short Conoco Philips Now

You can, and should, ignore the newsfeed, but as far as I can tell you can't hide or mute it, and it creates this sensation of light dread whenever I open the app.

Conclusion: Gambling is fun

Robinhood should not be your main brokerage account. That should be some place like Vanguard, where you can buy low-cost mutual funds without paying a commission, and set up tax-advantaged accounts like IRA's.

But if you have some money set aside for fun, Robinhood really does allow you to buy and sell US listed shares and ETF's without paying a commission, leaving you all the upside — and downside — risk from your stock market hunches.

Besides that, Robinhood allows you to buy and sell Vanguard ETF's like VTI (Total Stock Market ETF) and VXUS (Total International Stock ETF). As I like to say, although the personal finance and financial planning industries are obsessed with tax-advantaged accounts, there's no law against holding securities in a normal, taxable brokerage account. So if you'd like to save more money than you're able to in your IRA's and 401(k) accounts, you can buy and hold low-cost Vanguard ETF's in Robinhood without paying any commissions for the trades.

P.S. My top-secret gambling strategy

It seems crazy to write this much about a trading platform without revealing my proprietary gambling strategy. I have a simple rule: always bet the hard ways.

Wait, that's craps.

My proprietary gambling-on-the-stock-market strategy is to buy consistent dividend-paying stocks when they near their 52-week low. If the stock price recovers, I sell it. If it doesn't, I collect the dividend until it does. So I bought Royal Dutch Shell at an average of $38.73 and sold it at $44.86 (for my sins it's now at $45.27). Currently I'm holding BP, International Paper (IP), ConocoPhilips (COP), and the aforementioned VXUS.

I don't recommend this strategy to anybody, since it's based on nothing. But gambling, famously, is pretty fun.