Open Letter To Google’s Larry Page On ETFs

Rumor has it Google’s looking at getting into the financial biz. A few humble suggestions.

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Reviewed by: Dave Nadig
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Edited by: Dave Nadig

Rumor has it Google’s looking at getting into the financial biz. A few humble suggestions.

Dear Larry,

I read yesterday morning you all down at the big campus might be considering a foray into investment management or a brokerage or, well, who knows. That’s great! It’s a fine industry, and Google’s track record of innovation could mean exciting things for investors.

But I thought, as someone who also cut my teeth during the dot-com boom in the Bay Area, I might give you a little unsolicited advice. I’m sure you’ve already got Top Googlers on the case, but the financial industry is a funny place, and has a few potholes you might want to be ready for.

So without further ado, here are four things I think you should keep in mind, whether you’re looking to start a brokerage, a financial advisor shop, a money manager, or heck, why not a bank?

1) Fiduciary Is A Big Word

It may only have nine letters, but it’s the most important word in finance. I’m a longtime and loyal Google customer. I think you do right by your customers over and over again. But when you enter into a fiduciary relationship with your customer, it’s a whole different ball game.

What it really comes down to is that people are irrational when it comes to their money. I know I’ll jump onto a cool new Internet tool, or email platform or cellphone operating system just because it’s cool and different.

If that new shiny thing turns out not to be awesome, or if the company making it goes out of business or just turns it off, it can be annoying, but it’s not the end of the world.

Heck, we here at ETF.com lean on Google to run our email system, and when it occasionally borks for half an hour, it’s a pain, but it’s not the end of the world.

You don’t get that kind of free pass when it comes to looking after people’s money. In technology, there’s the idea of “9’s,” as you know. How many “9’s” to the right of the decimal place can you be off? A “four nine” system sounds pretty awesome. It means 99.9999 percent of the time, you get it right.

In finance, there really are no nines. You don’t get to mess up a client's $1 million account. That customer could have millions of dollars at stake, and if you let them down, they won’t just leave, they’ll sue you and win. That’s true if you’re a broker, a fund manager or really anyone in the chain of custody for client money.

The irony here is that Google may be better at some parts of this than the industry is currently. As it stands now, most online brokerage and bank accounts are protected by weak passwords, but I use two factor authentications to log in to Gmail to check on my fantasy football team.

Security in finance should be a much bigger issue than it currently is—just witness the endless cavalcade of credit card system breaches exposing all of our bank accounts to fraud, month after month.

So please, take it seriously, and you’ll be doing the whole industry a favor.

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2) Do Good

We’re in the middle of a “robo advisor” revolution. The reason’s simple: Long-term asset management isn’t actually rocket science. It requires, more than anything else, discipline. The main reason I believe that advisors—be they flesh or robot—are both successful and a societal boon is that they keep investors from doing things.

A good advisor isn’t calling her clients and recommending IPOs, she’s calling her clients and telling them not to panic when the S&P 500 drops 400 points.

As Google, you have the opportunity to reach millions and millions of people who are probably doing dumb things with their money. They’re racking up credit card debt. They’re letting their ancient 7 percent fixed mortgage drain away their life savings. They’re investing with expensive, underperforming active managers. They’re falling prey to oversold insurance products.

The biggest thing you can do is educate. Sure, you’ll find a way to make money. And heck, Google Finance is already a great investor resource. But I’m talking about real education that reaches millions of people.

If you decide to wade into some corner of the asset management business, you can make a lasting, positive impact on peoples’ lives by steering them toward smart, long-term decision-making and away from the Wall St. hype machine. That might actually be a bit of a new thing for you all.

Google doesn’t—to my knowledge—really specialize in content creation. Sure you do great marketing and information around your own products, but I don’t know anyone at Google with the title of “reporter” or “editor.” Even news.google.com is just a curated list of other people’s work.

Think outside that box.

3) Buy, Don’t Build

Actually making a new fund company, or a new bank or a new brokerage is a tough row to hoe. It’s certainly not impossible, and people do it all the time, but it’s got one big problem: regulators.

Considering starting a new discount brokerage business? There are dozens of small regional broker-dealers you could buy on the cheap. You may end up gutting them, but they’ll save you a year or more of paperwork. Want to make a bank? Ditto. Want to run an advisory business? I’m sure there are 100 RIA firms out there who’d be delighted to show you how the connections get made.

Want to make your own ETFs? Well, you certainly could do it from scratch, but I imagine there are a dozen smaller players in the industry who have exemptive relief, a small book of business and wouldn’t mind stepping aside.

Sure, acquisitions are messy. But so is the maze of regulators, self-regulating organizationss and exchanges that make up the spaghetti factory of modern finance.

 

4) Be A Little Humble

It’s very easy in the world of investing to think you’ve got it all figured out. I know, because I’ve committed that particular sin over and over again since I started out in this business, shortly after the 1987 crash.

Part of what makes this industry exciting—and dare I say it, fun—is that I learn something new each and every day. Sometimes it’s really arcane—how a particular order flows through a particular back-office process at the National Securities Clearing Corp. Sometimes it’s human—the latest advisor study from a Cerulli Associates or a Lipper. But it’s always something, and it’s always new.

The secret to finance, if I’m being honest, isn’t being smart; it’s worrying that you’re dumb. If you’re worried that you’re dumb, you’ll ask more questions. You’ll take more meetings than you think you need. You’ll get not just second, but fifth opinions.

Welcome

Finally, let me just say I’d be excited to see a nontraditional player enter the business and really shake things up. Mutual funds have been helping investors for 80 years at this point. ETFs have been on the scene for 20 years. Sure, plenty has changed in all those years, but honestly, a lot of it remains the same.

New players mean the opportunity for new ideas, new avenues and new ways to make investor outcomes even better. It’s impossible to know how Google entering the world of investment management might change things, but change they will. As TV Anchor Kent Brockman put it in a classic Simpsons episode:

“It’s difficult to tell from this vantage point whether they will consume the captive Earthmen or merely enslave them. One thing is for certain: there is no stopping them. The ants will soon be here.

“And I for one welcome our new insect overlords. I’d like to remind them that as a trusted TV personality, I can be helpful in rounding up others to toil in their underground sugar caves.”


Contact Dave Nadig at [email protected].

 

Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of etf.com. Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.