What Robinhood got wrong

GameStop's wild stock ride on Wall Street got so crazy recently that Robinhood and other platforms had to press pause on any more trades in those shares, as well as other affected stocks.

Betterment, the robo-investing platform that focuses on consumers with longer-term investment goals, was largely spared in all the excitement.

But Dan Egan, the fintech startup's managing director of behavioral finance and investing, was naturally paying close attention to what was happening. His job is to "keep an eye on how people actually make decisions," he told Protocol.

He shared his thoughts Thursday morning shortly after Robinhood announced the suspension of trades in GameStop and other stocks.

This interview has been edited for clarity and brevity.

What's your reaction to what happened?

Bubbles and mania always happen. At some level, what we're seeing right now is nothing new. But there's also a lot that is different or that is new. Psychologically, there's a huge difference between something costing anything like five cents, and it being free. When something becomes free, we over-consume. We don't think about whether or not we really care about what we're doing.

Another element is accessibility. It is now in your pocket. You can get push notifications from trading apps, etc. It's on a small screen that often is devoid of a lot of other context.

A broad-based context that is important to keep in mind is that we are in a pandemic. People are not able to go out and do a lot of the usual things that make them feel like a part of society and have connections to other people. We've got social media and so on that concentrate and funnel them during a time of a lack of connection into feeling that they are part of a movement or a tribe. There's obviously a psychological repugnance to the idea of short selling, and the fact that hedge funds are the 1% and we should destroy them. It became much more of a social movement game where they say, "Can we actually put a hedge fund out of business?"

There's a couple of things going on now that we need to be aware of. Robinhood gets paid for order flow. I have no idea if there's anything [conspiratorial about] Robinhood saying, "We don't want more risk from all this GameStop stuff. We're going to stop allowing people to trade it." That can happen without any kind of conspiracy theory or any kind of [belief that], "Oh, they're rewarding the people who actually pay them."

But I do think it's worth saying that Robinhood's traders or whatever, they don't pay them. The market makers and the hedge funds are the people who pay them. So right now, Robinhood's actual customers, the people who actually pay them, are telling them, "Hey, could you slow down this kind of trading? Because we're not sure that we can manage the risk of it right now."

How was Betterment affected?

Betterment invests our clients in low-cost diversified portfolios and exchange-traded funds. So some part of our clients' money would have been in GameStop and AMC and so on, but they're in it through diversified ETFs.

What do you think about Robinhood's decision to suspend trading? There's the view that it actually may hurt them long term.

Absolutely. When you brand yourself as the company that is helping the little guys take on the big guys and redistribute the wealth, and then exactly at the point in time when that is happening, you shut it down, it's very clear you shouldn't call yourself Robinhood.

Clearly, there's more focus on fintech trading platforms, and even some skepticism about the use of these types of apps and platforms. This was underscored by the comments of Massachusetts Secretary of the Commonwealth Bill Galvin, who also filed a legal complaint against Robinhood, which he has accused of turning a risky financial activity into a game. How do you view concerns about investment platforms?

Robinhood and other brokerages, they don't care if you're good at trading or if you're making money or not: They're completely indifferent to it. They care that you are trading.

On the other hand, we charge 0.25% of our clients' money that we manage. If we lose money, we lose revenue. The kind of analogy I have here is that you would never tell somebody, "Oh, you're just learning to ski? Go to the top of the mountain and take the toughest trail down," because they're likely to really get hurt. You start off on bunny slopes and you learn how to do stuff there, and then you go slightly steeper, and then you build up muscle memory, the ability to read the ground.

The same thing is true of investing. I don't mind people who like DIY trading, per se. But I don't like it when a company puts a person up at the top of the mountain, with no experience and no ability to understand what they are getting into in ways that can dramatically hurt them, then just [lets] them loose. You should only let people who have shown that they can really handle the full gamut of options trading derivatives margins, etc. They should prove that they really can handle what they're getting into. And I don't think that a lot of the brokerages do that well.

That's a point Galvin raised. Do you think that Robinhood is doing that, exposing amateurs to unnecessary risk?

Robinhood definitely has made it easier. They have made it easier to get yourself into trouble. By virtue of not understanding how things work under the hood, they've done it in a way that makes it seem like a fun game rather than serious investment.

What are your thoughts on the push for new or more regulation? How do you see it affecting your business?

We're a fiduciary. We're held to that high standard already. None of the concerning regulations are a problem for us because we already do all these things.

From our point of view, it's great. More and more consumers should have the option to be treated by an expert in a way where they can trust those options, where they don't have to be second guessing or considering whether or not they're getting taken advantage of. I do think that regulation always needs to be done carefully so that it benefits consumers, and it doesn't just shut down choice.

Overall, do you think what happened and the reactions also hurt other platforms like Betterment?

Yeah. One of our competitors doing something really bad and getting lumped in together, definitely there's the possibility of that. I think people are expecting the ability to do these things now. It's just a question of using a provider who seems to have a good reputation. There's lots of choices out there.