Robinhood made waves Thursday when it announced plans to start offering Checking and Savings services paying 3% interest through its mobile brokerage app.
But many financial advisers expressed concern on social media that the fintech company isn't being completely honest with consumers about what sort of accounts they are getting.
"My issue is the company is tiptoeing around disclosure, and they have used carefully crafted language so as not to trigger liability or potential regulator issues of how [they're] marketing their products," said Bill Winterberg, founder and CEO of FPPad.
The issue is that while Robinhood's Checking and Savings will operate in a manner similar to traditional bank accounts, they are in fact brokerage accounts investing in short-term U.S. Treasury bills. The service is not insured by the Federal Deposit Insurance Corp. Instead, the accounts will be insured by the Securities Investor Protection Corp., according to the fine print on Robinhood's website.
Unlike the FDIC, SIPC does not guarantee depositors get all their money back in the event that Robinhood goes under. If the company were to fail, SIPC could cover up to $250,000 in losses.
However, SIPC CEO Stephen Harbeck told Bloomberg that he doesn't agree that the funds are protected by SIPC.
"Had they called us, I would have told them what I just told you, in that I have serious concerns about this," Mr. Harbeck told Bloomberg. "This has gigantic ramifications for the banking industry."
Robinhood could not be reached for comment.
While Robinhood never calls the service a bank account, Mr. Winterberg pointed out on Twitter that many financial media outlets, bloggers and YouTubers were unable to recognize the difference. He fears this will result in consumers opening accounts without fully understanding that what Robinhood is offering is an investment, not a banking account.
"I acknowledge that U.S. Treasuries are considered to be one of the safest investments you can purchase today, but just because it is one of the safest investments does not mean it is completely free of risk," Mr. Winterberg told InvestmentNews. "Investors should be adequately informed and institutions should adequately disclose that the investor is opening an investment account, because potential for loss of money exists."
Peter Huminski, president of Thorium Wealth Management, had one client call him about it, believing it to be a high-yield bank account. Mr. Huminski pointed out that in addition to being more risky than a bank account, Robinhood Checking and Savings has other limitations as well.
For example, investors are limited to depositing $1,000 per day and $5,000 per month at an ATM; checks sent by mail have a $10,000 per month maximum. And funds might not be available for four or five days.
"With all of these strings attached, it just doesn't make sense to me," Mr. Huminski said. He encouraged his client who inquired about it to read the fine print. "It's a bait and switch. It's a brokerage account with a debit card attached to it."
Mr. Winterberg points to the example of Charles Schwab's YieldPlus Bond Fund, which was marketed to investors as a low-risk alternative to money-market funds. The crash of mortgage-backed securities during the financial crisis caused the fund to lose 9.3% of its value, and the Financial Industry Regulatory Authority Inc. in 2011 ordered Schwab to repay $18 million to investors.
While it's unlikely Robinhood will get into similar trouble, the possibility exists, Mr Winterberg said. If it did, it could be especially damaging to mass-market consumers using Robinhood as a substitute for a banking account. If someone was unable to pay their rent because the value of their investment account deceased, it could "create a cascade of events that leads to some really bad stuff, all because they didn't understand what accounts they were opening," he said.
"I'm not trying to defame Robinhood, I don't want them to go out of business," Mr. Winterberg added. "I never want to see investors harmed by bad products or mis-sold products. And that's what I see here, is confusion."
Not every adviser was against the idea of Robinhood Checking and Savings. Tyrone Ross, managing partner at Noble Bridge Wealth Management, loves the feature and was disappointed by the pessimism expressed by other advisers.
Mr. Ross acknowledges that there are some valid concerns among the industry, but believes the negative reaction is driven more by traditional advisers feeling rattled by innovation.
Even if everything wasn't perfectly laid out, it's the role of startups to push boundaries, step on toes and disrupt traditional industries, Mr. Ross said. After all, when has Wall Street ever been perfectly transparent to investors?
"Do your clients know to the letter what they pay in an annuity?" Mr. Ross asked. "Where is the uproar every single time [an adviser] gets an account transferred in and clients don't understand the difference between A shares and C shares?"
Mr. Ross also called Robinhood "fantastic" because it's reaching consumers previously ignored by the financial services industry.
"If you look at the people who are excited about it … are the people who have been excluded by banking and investing for years: young people, black and brown folk," he said. "They want to bank themselves. There's so much power in that."