Robinhood Faces Potential Lawsuit What You Must Know Beginner Investors
Robinhood is in hot water recently after Massachusetts securities regulators filed a complaint against Robinhood Financial LLC.
The app is facing backlash for “gamifying investing” and exploiting millennials.
Robinhood is just one of many investing apps that rose in popularity with new, younger investors this year after many turned to invest during the lockdown.
The Secretary of the Commonwealth William Galvin, filed an administrative complaint Wednesday alleging “that Robinhood violated securities laws by aggressively marketing itself to Massachusetts investors “without regard for the best interest of its customers.”
The claim states that Robinhood is using “gamification strategies,” such as showering a user’s screen with virtual confetti every time they make a trade.
Galvin said in a statement, “Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical but also falls far short of the standards we require in Massachusetts.”
Robinhood is just one of the apps that exploded with new investors during the beginning of the lockdown.
While learning is all about making mistakes, Massachusetts is explaining that this gaming method could be especially concerning for millennials.
Massachusetts holds many prominent asset managers such as Fidelity Investments and State Street Corp., with Boston being named the birthplace of the mutual fund.
The state stated, “The median age of a Robinhood customer is 31, and roughly 68% of the company’s customers in Massachusetts report having little or no trading experience.”
The complaint also highlights that one customer who has no investment experience made 12,700 trades within a six-month period.
Galvin stated, “What we really want to make sure is that these people are treated fairly. We do not believe they are. They are basically having the experience of trading, but it’s a reckless experience because of the way Robinhood has treated them.”
The danger is that investors may not always understand the risks associated especially if their first-time traders.
Robinhood offers commission-free trades also with a $0 account minimum, making it more affordable for people to have access to investing than ever before.
According to Yahoo News, “By making trading stocks and exchange-traded funds so cheap, easy and maybe even fun, it could be enabling unsophisticated investors to buy and sell too-risky investments too often.”
Robinhood has paved the way in investing in the form of a unique digital experience, however, the addictive model can lead you on the wrong path if you’re not careful.
Meanwhile, Robinhood has spoken out and in a statement, they stated, “Robinhood is a self-directed broker-dealer and we do not make investment recommendations.”
They continued: “Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them. We’ve also made significant improvements to our options offering, adding safeguards, and enhanced educational materials.”
Massachusetts is seeking an unspecified fine against Robinhood as well as an order that would require them to hire an outside consultant to review its platform, infrastructure, and policies and procedures, among other penalties.
While critics warn about the design and accessibility of the app, Robinhood has made ground-breaking changes for the brokerage industry for charging zero commission.
Yahoo News even credits Robinhood for “helping drive shares in Tesla and other Big Tech companies sharply higher last summer while the economy struggled.”
Investing always has potential risks associated and you should take the extra measures in doing the research before ever investing in a company.