Robinhood, a digital brokerage firm, announced on Thursday it would offer no-fee checking and savings accounts alongside its brokerage accounts, with an enticing 3 percent annual interest rate.
Brokerage firms often offer accounts for customers to hold cash until it can be invested in securities, but those accounts aren’t meant to be strictly for savings, SIPC’s Stephen Harbeck said.
On Robinhood’s website, it explains that users need to sign up for a Robinhood account to get the checking and savings accounts. But it says users do not need to invest to use the accounts, something Harbeck says is contradictory.
Brokerage firms often offer accounts for customers to hold cash until it can be invested in securities, but those accounts aren’t meant to be strictly for savings, Harbeck said. Money sitting in such accounts but not intended to buy securities may not be covered by the SIPC, which insures accounts for up to $250,000 of cash in the case of a broker’s failure.
The former Army sniper has had some experience with that. His tenure at the the Securities Investors Protection Corp., beginning as CEO in 2003, spans the liquidations of Lehman Brothers, Bernard L. Madoff Securities, and MF Global.
Cash balances sitting in accounts collecting interest for a long period of time also skirt the SIPC rules on what’s covered in the event of a collapse, Harbeck said. It may fall under the category of a loan because the brokerage can take that money and invest it income-generating investments like Treasury securities. A loan wouldn’t be covered by the fund. “We want to make sure that investors know there’s some risk there,” he told CNBC.
The SEC, which oversees SIPC, declined to comment.
Robinhood did not immediately respond to a call and email for comment.