Why I Closed My Robinhood Brokerage Account

The broker I have been using for my investment newsletter had issues for two days in a row on March 2 and March 3rd. There were some outages on March 9th as well. As a result, I was unable to make any investments. I am lucky that I was able to make some investments on Friday, February 28th. In retrospect, I should have waited. But as I have been doing for a while, I invest when I have money to invest. So the next time I will have money to invest is the last week of March.

The broker is Robinhood. I have been a huge fan over the past five years. I was one of the first to sign up and use it. I also used it for my newsletter, where I share with investors my process on building a low-cost diversified dividend portfolio to live off dividends in retirement.

During a turbulent time in the markets, brokers are overwhelmed by demand for their services. As a result, their systems can have an outage. This happened with Fidelity last week of February, and with Schwab as well. This happens with brokers during a surge in activity. That's why it is important to have another broker handy.

I preach about diversification when it comes to creating a portfolio. I should mention that diversification also means spreading assets around between different brokerages.

In my non-newsletter accounts, I have accounts at several institutions. I also do that because of SIPC insurance. Brokerage accounts in the US offer protection on the first $500,000 of assets lost due to broker failure. This insurance does not protect from the value of your holdings going down. It only protects you if your broker fails. In other words, if you have 10,000 shares of Altria (MO) worth $40/each, and your broker fails, you will be given back your 10,000 shares. However, if you have 10,000 shares worth $100/each, you may lose half of them if your broker fails. This is why it may be a good idea to spread assets between several brokerage houses.

You may be thinking that your account value may be low today. I disagree. Once an account reaches $100,000, it may be a good idea to open a second one. That's because $100,000 that compounds at 10%/year will double every 7 years, even before new cash contributions to it. This means that in 14 years this account may be worth $400,000, without even adding a single cent. Obviously the 10% annualized returns is an estimate, based on history. It is still something to keep in mind if you are to be investing for 10 or 20 years.

If a broker fails, it may be difficult to get assets back in a timely manner. That's why it is good to have another account. If a broker experiences outages, then it may be good to have another broker/s to execute trades through them.

In the case of Robinhood, having two consecutive days of outages was unacceptable to me. When was Robinhood was down initially, but I was busy and didn't pay attention to it until the end of the day. I was hopeful that by the second day, things would get back to normal. Thus my patience was running thin. Having a third day of outages after a week was just the tip of the iceberg from there.

Fool me once, shame on you. Fool me twice, shame on me.

I chose Robinhood because it offered commission free trades, and their platform was easy and intuitive to use. Noone else was offering commission free trades at the time. As a result, I was able to let a few things slide.

Nowadays, every other broker in the US offers commission free trades. Many brokers offers bells and whistles such as research, and ability to download transaction information. In addition, you can see their financial situation easily, since many are publicly traded.

I wanted to let you know for those using Robinhood that I just opened a TD Ameritrade account last Tuesday. I initiated a transfer of assets to TD Ameritrade from Robinhood. By Friday, the stocks were already transferred into my TD Ameritrade account. I was charged a fee of $75, but TD Ameritrade will reimburse for it. I may also be able to get a bonus for moving assets there.  I will likely add new money to work at TD Ameritrade for the time being.

Right now I have some dividends still being sent to my Robinhood account. Per discussion with customer representatives, these will be swept to my TD account within 5 - 7 days of receipt.

TD Ameritrade is in the process of being acquired by Schwab. I am fine with that, since Schwab is a reputable broker, which also has branches that I could visit.

The other thing that I have had on the back of my mind with Robinhood is that it is self clearing. They used to have another company called APEX do the clearing for them, but starting in late 2018 they started to clear everything in house. If their systems are down and not up to par, I wonder if that is going to be an issue down the road. Robinhood Securities performs certain centralized cashiering, bookkeeping, and trading functions for your cash and margin accounts. In addition, Robinhood Securities handles the delivery and receipt of securities purchased or sold by clients, receive and distribute dividends and other distributions, and process exchange offers, tender offers, and redemptions.

Robinhood has had it fair share of negative publicity over the years. They popularized commission free trading, and essentially forced the other brokers to become commission free as well. It is understandable that the financial media, which relies on ad revenue from traditional financial institutions would hate on this disruptor. For example, everyone was writing articles a few years ago that Robinhood received payments for order flow. The issue at the time was that the rest of the brokers were also receiving payments for order flow, while also charging commissions to their customers. I do not care if someone makes 0.3 cents for each share I buy, because that is negligible in the grand scheme of things.

I was willing to get a lot of things slide, but when they started having issues when I could use them, I realized they are no longer a good fit for more. Plus, I think that I have outgrown the need for Robinhood. Other brokers make it very easy to download transaction information and portfolio holdings to excel. With Robinhood, they did not allow that, which was silly.

Relevant Articles:

- Stress Testing Your Dividend Portfolio
- Robinhood Offers Free Stock Trading for Dividend Investors
- My Favorite Exercise With Dividend Paying Stocks
- Stock Investing is Commission Free in the US