[graedus]

> When the return is higher, the risk must have gone up too, somehow.

I want to emphasize this point. You are never* getting returns for free, you are getting paid to take on some risk. If someone is trying to sell you "risk-free" returns that are higher than widely-known market rates, they are lying to you by downplaying, omitting or obfuscating the risk associated with those returns, and warning bells should be going off in your head. Proceed with caution.

* You can of course find better risk-adjusted returns than the market by way of information asymmetry in your favor. Suffice it to say that is not the case with a consumer financial instrument aimed at "the masses" (not high net worth individuals).

[dunpeal]

> You are never getting returns for free

Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.

We all live every day with risks far greater than that risk level.

If you look at the current treasury yields, they are very close to 3%. Add the interchange revenue, and RobinHood can pull a 3% guarantee while still making a (narrow) profit.

If treasury yields go down, then no problem: RobinHood can instantly adjust their returns downward. If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.

My understanding is that any cash and securities you own when they go out of business is covered up to the limit. So if you have $250k in your RobinHood checking/saving, that will be guaranteed by SIPC.

DISCLAIMER: I am not a financial adviser and nothing I ever post is financial advice.

[graedus]

> Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.

There are all kinds of other risks associated with buying US treasury bills besides the US government defaulting, which is why you get paid - but you're right, the risk is low so you get paid a low amount. You have opportunity costs during the time that your money is locked up in treasuries. You also incur some inflation risk. If we are specifically talking about T-bills then we're talking about treasuries with maturities of less than one year, meaning that particular risk is low. There is interest rate risk. If you have an emergency and need to convert back into cash before the maturity date hits, you have to sell them on the market, where you may lose money if interest rates have increased. If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.

> If you look at the current treasury yields, they are very close to 3%.

The 10-year bond is 2.91%, the 20-year bond is 3.05%. Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood (assuming they are in fact investing in long-dated treasuries).

> If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.

The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.

[dunpeal]

> You also incur some inflation risk.

Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.

> If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.

That counterparty risk is exactly what SIPC insures.

> Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood

But RobinHood can make certain reasonably safe assumptions about the flow of capital into their various accounts, and adjust based on that.

For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.

Of course, if they ever stop growing, that assumption no longer holds. But the very nature of startups is to bet on growth, even at the risk of potential bust (since failing to grow rapidly means failure).

> The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.

Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.

[graedus]

> Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.

You're right, inflation risk isn't particularly relevant when comparing treasuries vs checking accounts or cash. Those are all exposed.

> For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.

Ha, if we can just assume they'll have money pouring in faster than withdrawals, even when markets experience turmoil, there's very little to worry about! I don't know exactly how sure we can be about that - or at least, for how long.

> Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.

Wise, and it sounds like we're on the same page. All I was arguing is that there is some risk here that's being glossed over by selling it as just-another-checking-account-except-you-get-more-money. Maybe small/unlikely risk, but you're not getting 3% for free. You can always just go buy some IEF or TLT or actual treasuries too.

[incompatible]

Losing money on investments of client funds was how MF Global went broke, for example.

[snowwrestler]

If this worked well enough to allow 3% interest on checking accounts, literally every single bank would already be doing it.

[dunpeal]

> literally every single bank would already be doing it.

Your typical bank has far more than RobinHood's 300 employees, and far greater expenses in general.

This is an example of a disruption.

[snowwrestler]

What is your theory, that every single other financial institution has willingly taken on a bunch of expenses they don't need to?

This comment just reinforces my feeling that Robinhood's business model is to extract money from credulous customers who think they are too cool for regular banks.

[kdot]

Most large banks have thousands of employees, tons of retail locations, massive fraud exposure, and overbuilt legacy infrastructure.

For example Chase has over 10 banks within blocks of each other in downtown Chicago.

[dunpeal]

> Most large banks have thousands of employees

Hundreds of thousands, actually.

Wells Fargo had 262,700 employees in 2017. Bank of America, Chase, Citi - all had over 200,000 employees that same year.

These numbers have only gone up since then.

[what_ever]

By that logic no company would have offered your free two day shopping for paying 70 bucks a year when Amazon Prime launched.