Broker Check

If It’s Free, You Might not be the Customer

February 02, 2021

We believe there are at least two elements to the Robinhood story that deserve to be told with emphasis. The first element is what you’ve already heard: the oddity that is short selling. The second element that we will discuss here is the simple fact that nothing is free—and Robinhood proves this. Further, if something is touted as free, then you should most certainly question what the roles are that everyone is playing.

As many of you already know, we announced a fairly significant change when we published our fee-based services. While we have offered those services for a while, we didn’t necessarily place them front-and-center. Well, the situation with Robinhood provides an ironic opportunity to highlight what might be the most important reason for our change.

The Expectation of Free Goods and Services

We’ve created an interesting expectation in our society, and lest you think that Todd and I are sitting on top of some mountain, looking down, and observing everything unscathed, rest assured that we are just as guilty as anyone. The expectation that I am referring to is the one that says that you should receive something for free. In case you need to test this assertion, just go into the app store for your phone (hopefully there are some reading this who feel left out, because they have a flip-phone—trust me, if you’re one of those people, you’re the lucky one), or check out the commercials for…I don’t know…say…Robinhood? Seriously, though, other similar platforms tout the same free trading that Robinhood did/does (will they survive?), including e*Trade, TD Ameritrade, and others. Heck, you can even have a company scour the internet for exactly what you need to find and it costs you nothing—that’s a reference to Google and its 100k+ employees.[i] Wait…if they don’t charge you to search for stuff, then how do they pay all of those employees?

What Google will tell you is that they don’t sell your personal information, but they sell your data[ii]–just typing that “out loud” kind of has a different feel today. They will also tell you that they sell ads.[iii] The funny thing about the ads, though, is that a selling point for advertising through Google is that they can help match your ad with the best set of eyes, because of…wait for it…the data they can mine. So, even though Google does, in fact, sell ads, and while that might even be their number one source of revenue, the real value in advertising with Google would seem to be the fact that they can help you target a specific audience, which absolutely depends on being able to mine data. The bottom line seems to be this: data, in the form of what we willingly give to companies or that they collect through other means, such as cookies, is the issue—this is where Robinhood comes in.

What are the Roles and Who’s Playing Them?

Whether you realize it or not, there’s actually a fair bit that goes into simply making a stock trade happen. As with anything else, if a job must be done, then someone’s time and effort must be exerted, and I don’t know about you, but I’m not working for free—I’m sure that none of the nearly 2,000 employees at Robinhood are either.[iv] That being said, Robinhood actually does a fair job of breaking out what takes place behind the scenes on its own website. So, how does Robinhood cover its expenses? It turns out that they sell their data.[v] This article does a good job of breaking down how firms benefit from this practice.

As referenced above, when something is presented to you as free, you have to wonder what role you are being asked to play. I don’t mean to be too dramatic, but think of the lowly cow in the slaughterhouse. What a life that cow leads, amirite? I mean, free food and lodging, doesn’t have to work for its provisions, and only has to pay with its life. Wait…what? Sure, the cow uses the farm’s facilities to function, and has everything it needs provided, but it’s obviously the consumer who is paying for the cow’s use of the facilities by paying for the products that come from the cow.

We are all very familiar with the simple fact that slaughterhouses exist, but the cow isn’t. We would also most likely be able to recognize a slaughterhouse if we saw one, but a cow obviously doesn’t. If you were able to explain a slaughterhouse to a cow, I don’t know that it would ever agree to the free life being offered to it. It strikes me that this would also be true of the business practices of firms like Robinhood.

The simple fact that there is so much surprise and outrage going around tells me that these practices are not touted and are not placed front-and-center for everyone to see and understand. Sure, we could dig and research, and probably uncover this kind of thing, but if that takes a fair bit of effort, then that might be the impediment that is being depended upon to prevent the problems of such activities from coming to light—i.e., there is always a point at which you can bury something that will render the perceived benefit of its unearthing unworthy of the cost of digging it up (fans of The Curse of Oak Island might dispute this assertion, but that’s another topic for another day).

Violations of Trust Cause Chaos

As I’m sure many of you know, when your trust is violated, things can feel very chaotic. Before I go on, however, allow me to demonstrate chaos for the uninitiated: you and I are going to play a game—you go first. Have you moved yet? If you’re like most people, you froze, or if you’re like the minority, then you might have gotten wise and made a sudden movement. Both of these types of people have the same thing in common, though: they have no basis for determining a good decision from a bad decision, at least in the context of the game. The reason for this is very simple: the objective and the rules of the game have not been explained—i.e., you don’t know where you’re trying to go and you don’t know what you can and can’t do in trying to get there.

What we have, in the instance of Robinhood, would seem to fundamentally be a violation of trust. The surprise and shock that many are expressing would seem to result from the simple fact that folks thought they had a handle on Robinhood’s role, as well as their own, and when it was discovered what was really going on, this highlighted the fact that the relationship between Robinhood and society, or at least its users, was not what it was thought to be.

Socialization is “the process beginning during childhood by which individuals acquire the values, habits, and attitudes of a society.”[vi] In other words, it is through our interactions with others that we learn a fair amount, if not the majority, of the rules that we need to follow in life. Therefore, we rely upon our relationships to orient ourselves and understand our place in society. When our grasp of relationships is thrown into flux, then we begin to question our understanding of the rules, and chaos ensues.

Our Central Mission is to Resolve Chaos

The trust that our clients place in us is sacred and we depend upon forming solid relationships for the viability of our practice. In our opinion, one of the cornerstones to that is ensuring that clients know that they can depend upon what they have established with us and that any changes that we make are improvements. None of that would be true if we didn’t communicate. In other words, if we were not straightforward we know that we would be putting all of that at risk, so this is why we make efforts to communicate. Further, we always want to ensure that it is crystal clear what role everyone plays, including who our true customers are. To be sure, there are forces within our profession, notably regulation, that are pushing everything in the fee-based direction, but prior to announcing our fee-based services, we also recognized that if someone doesn’t pay a fee, they should, and probably already are, wondering what the incentives are for us. As this Robinhood situation demonstrates, the conclusions that one might reach on their own are less than flattering, and we most certainly do not want to leave that to chance.