Robinhood’s New Retirement Accounts Put a New Spin on ‘You Only Live Once’

The phrase “you only live once” is usually taken to mean that life is short, so have fun and take big risks. But if you think about it, “YOLO” could easily mean the opposite: You only live once, so take precautions and don’t screw it up.

Many investors probably associate Robinhood Markets with the first sentiment, after the online broker’s surge of activity during the “meme stock” trading frenzy in early 2021 that to many exemplified the YOLO way of trading. But as Robinhood aims to mature and grow in a far less frothy environment, the now decade-old company may be increasingly associating itself with the latter interpretation as well.

Several months ago, Robinhood began offering traditional and Roth individual retirement accounts—the vehicle many investors use for their most defensive financial choices. As an incentive to customers, and for people like gig workers who don’t benefit from company matching, Robinhood will add a 1% match to any deposit into the account, including when transferring an old IRA or 401(k) from another platform.

Retirement could be a transformational expansion for Robinhood as a public company, helping diversify its revenues away from the booms-and-busts of more speculative trading and widening its appeal to new and existing customers.

Some of Robinhood’s trading DNA remains in its retirement product. Unlike online platforms such as Betterment or Wealthfront, Robinhood won’t be charging a percentage of retirement assets as a fee. Instead, it will monetize retirement accounts the same way it does regular taxable ones: via trading revenue. In Robinhood’s commission-free model, that comes via controversial payment-for-order-flow—in other words, it gets paid by market makers instead of by the customer with the retirement account. In its retirement account, Robinhood offers trading in exchange-traded funds and stocks, as well as some options trading for customers who qualify.

This pricing scheme has some key advantages. Robinhood can continue to offer free services, as part of its ethos of democratizing finance. By contrast, the fees charged by other retirement products, such as a target-date mutual fund, can be a meaningful factor in investors’ long-term returns. The median age of a Robinhood user as of February was 33—customers for whom far-off tax benefits might seem less relevant, but also for whom riskier, more aggressive investing may be appropriate even for retirement.

But, unlike many competitors, it also means Robinhood won’t necessarily get a steady revenue stream that comes in whether customers are trading or not. The more customers commit to regular contributions, though, the steadier it may be, since each new deposit that is invested is a trade, or even multiple trades.

Unlike an automated “robo adviser” or a retirement mutual fund, in a self-directed retirement account, customers have to decide for themselves how they want to invest and trade. Importantly, the decisions they make in their retirement account may be very different from how they trade in an account designed for speculating with a pot of money they are comfortable risking. Because when it comes to long-term returns, a core finding of financial research is that active trading is typically detrimental to individuals’ performance over time.

A study published in 2000 titled “Trading Is Hazardous to Your Wealth” looked at nearly 67,000 households with discount brokerage accounts from 1991 to 1996. It found that people who traded the most underperformed the market annually by more than 6 percentage points. Some of that can be attributed to commission fees and taxes. But a later review of retail brokerage accounts in Taiwan found that about a third of small investors’ underperformance was due to bad timing and trading losses.

Tax protection can make trading in a retirement account advantageous compared with a taxable account racking up capital gains, says James Choi, professor of finance at Yale School of Management. But that shouldn’t be an inducement to try to beat the market with big bets on single stocks: “You expose yourself to unnecessary risk with concentrated positions,” he says.

Additionally, there are some key differences when compared with trading in a taxable account. For one, you can’t trade on margin in the same way in a retirement account. Traders also can’t take tax losses when they sell a losing investment from their retirement account.

Of course some trading can be necessary even in a long-term retirement portfolio, like rebalancing a portfolio between parts that outperform and underperform, or to change allocations between assets like bonds and stocks with age or risk appetite. Some investors are willing to pay advisory fees to take trading decisions and complexities out of their hands. Robo advisers such as Betterment, which doesn’t even offer single-stock trading, provide algorithms that make these trades without the user’s specific direction.

Robinhood’s app presents users with the opportunity to use an automated tool to trade into a portfolio of several exchange-traded funds when a customer invests a deposit, with the automated mix based on things like age and risk appetite. So far, more than half of Robinhood’s retirement customers use its recommended portfolios to invest. But it doesn’t then automatically adjust that portfolio. The company has said it is working on an advisory program, which could enable it to provide personalized investment advice—or in theory, even automated robo trading.

“Robinhood Retirement works for us and for customers, both passive set-it-and-forget-it investors and folks who want to trade more actively,” says Sam Nordstrom, Robinhood Retirement product manager.

So from shareholders’ perspective, the sweet spot for Robinhood may be to look for a retirement offering that generates enough transacting to produce a steady revenue bump, but not so much that it simply replicates the rest of the business and doesn’t work out well for customers. The one thing that is missing from both interpretations of YOLO is moderation.

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