From today’s @WSJ “[Robinhood] differed from most major brokerage firms in a critical way: It wasn’t part of a well-funded colossus that had myriad sources of cash and sprawling compliance teams.” With financial institutions, I can’t help but wonder if bigger really is better. 1/

This same issue came to the fore when the Reserve Primary money market fund famously “broke the buck” in 2008. The fact that Reserve Management was focused on a single thing—managing cash assets—left it little wiggle room when that business went south. 2/

Bigger firms with lots of different businesses also have more on the line reputationally—and more incentive to save customers if one of their business lines hits a rough patch—than do less diversified ones. If a Fidelity MM fund hit the skids, you can be sure they’d shore it up.

Then there is also compliance and other stopgaps, referenced briefly in the article. I don’t have much knowledge of this part of it, but it stands to reason that bigger = more such safeguards. 4/

That’s not to say that the giant financial institutions don’t have downsides; the big firms have gotten into lots of stupid stuff over the years! There was more than enough of that to go around in the GFC. 5/

I also recognize that the financial services industry is huge and diverse. I think my points mainly apply to firms that are holding and managing assets for people, not really to those advising on these matters. 6/

But from a consumer standpoint, I can’t help but wonder if it’s generally good counsel to steer people to big investment firms/brokerages that are diversified and have more wherewithal/incentive to make customers whole if something goes wrong with one of their businesses. 7/7