Stocktake: Buffett is right about populist Robinhood

There really isn’t anything heroic about the zero-commission broker’s business model

Warren Buffett isn't keen on zero-commission broker Robinhood and it seems the feeling is mutual.

Robinhood, in the headlines this year following frenetic retail trading in GameStop and other meme stocks, is "taking advantage of the gambling instincts of society and it isn't admirable", Buffett said recently, adding it was "a very significant part of the casino aspect" of the stock market in the last year.

Predictably, the company responded by playing the populist card.

“There is an old guard that doesn’t want average Americans to have a seat at the Wall Street table so they will resort to insults,” a spokesperson said. A subsequent blog post complained that “the elites benefited from a stock market that kept many families sidelined from participating while they amassed huge wealth from decades of investing”, adding that people are “tired” of the Warren Buffetts of the world “acting like they are the only oracles of investing”.

Robinhood says its mission is “democratising finance for all”, but there is nothing heroic about its business model.

In December, Massachusetts securities regulators filed a complaint citing its “aggressive tactics to attract inexperienced investors” and its use of “gamification strategies to manipulate customers”. In the same month, Robinhood agreed to pay $65 million to settle charges from the Securities and Exchange Commission (SEC) that it misled customers “about the true costs of choosing to trade with the firm”.

Hyperactive trading is good for Robinhood – it generated $331 million in payment for order flow during the first quarter – but decades of research confirm overtrading is very bad indeed for investors.

Inexperienced amateur traders may well see Buffett (90) as an irrelevant old man, but they would do well to heed his words rather than falling for Robinhood’s financial populism.