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Robinhood Cash Management: Heroic Rate, but Is There a Risk?

Dec. 17, 2018
Advisors, Investing, Investments
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For those seeking a better return on their savings — and who doesn’t want that? — the investment app Robinhood might have seemed like a knight in shining armor last week. When announcing their new checking and savings accounts, the company said they would pay a 3% interest rate, significantly higher than the current average rate of 0.09% offered by banks nationwide.

Alas, the heroism didn’t last. As soon as Robinhood announced their new accounts, they caught a fair amount of flack for implying these were bank accounts, when, in fact, they’re investment accounts. Long story short, the company has since back-tracked, making it clear these are investment accounts, changing the product name to “cash management” accounts and removing references on their website to a 3% rate.

Currently, if you’re interested you can sign up on a waiting list; the accounts are slated to be available in 2019. If the company does end up offering a 3% interest rate, it will be hard to resist. Here’s what you need to know before opening an account:

Make sure the account is insured

The brouhaha around these accounts revolved mainly around whether they were insured. Robinhood said they were; the insurance agency in question said, not so much.

A bit of background: Most traditional bank accounts — in this case we’re talking both old-school types with brick-and-mortar branches and newer online upstarts — come with FDIC insurance to protect depositors in the event of a bank failure. More than 500 banks failed from 2008 through 2015, according to the FDIC.

But investment accounts, which Robinhood’s cash management accounts function as, are different. When you stash your cash in a brokerage account, your money generally is protected by the SIPC — that’s the Securities Investor Protection Corporation. If a brokerage company fails, then generally up to $250,000 of your cash is protected (a total of $500,000 in cash and securities is insured, but the insurance limit on cash is $250,000).

When it first announced its new accounts, Robinhood said they’d be insured by the SIPC, but that apparently was news to SIPC, which said the accounts wouldn’t be insured by them. SIPC noted that the insurance only covers cash if that money is in an account with the intention of being invested.

But on Robinhood’s help page, it originally said this: “You do not need to invest to use Robinhood Checking & Savings.” (That language has been removed.)

“SIPC protects cash that is deposited with a brokerage firm for one limited purpose … the purpose of purchasing securities,” Stephen P. Harbeck, president and chief executive of the SIPC, said in a statement emailed to NerdWallet.

“Cash deposited for other reasons would not be protected,” he says. “SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose.”

In response, Robinhood said it “plans to work closely with regulators” as it prepares to launch its cash management program.

The controversy does not extend to Robinhood’s brokerage accounts, which remain SIPC-insured.

How do other brokers offer bank-type products?

Robinhood is not the first brokerage to offer a bank-type product. What are those other firms doing for insurance?

  • Stash Invest partnered with Green Dot Bank, which is FDIC-insured, to offer its debit account.
  • The new Smart Saver account from Betterment is an investment account — your money is invested in bonds — so SIPC insurance would apply if Betterment failed.
  • Acorns partnered with Lincoln Savings Bank, which is FDIC-insured, for its checking account.

What you can do

The message for consumers is: Check carefully before moving your money. You definitely want to earn the highest interest rate you can. But company failures are real, so make sure you’re protected by either FDIC or SIPC insurance.

That said, Robinhood is a major financial services firm, and the insurance questions arising now are unlikely to persist without a response from the company. If it can sort through those issues and deliver on the promise of an insured account with a 3% yield, it might prove to be your savings’ hero after all.

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