Charles Schwab (SCHW) launched its robo-advisor portfolios for retail investors this week with the slogan, “Investing has changed forever.” While the success of its automated platform isn’t yet clear, what is evident is that the gloves have come off in the world of robo-advising.
The CEO of robo-advising competitor Wealthfront, Adam Nash, attacked Schwab’s Intelligent Portfolios online with a variety of arguments, one of which was labeled: “Charles Schwab has become Merrill Lynch.” He didn’t mean that as a compliment.
“Charles Schwab documents over 14 pages of fees on its website,” Nash wrote. “And as a sweet farewell, if you actually decide to move your account to another brokerage firm, it will take another $50 on the way out.”
Another complaint made by Nash concerns Schwab’s cash-sweep program, which affects from 6% to 30% of an account’s value.
“You might not know this, but Charles Schwab no longer makes most of its money from trading or commissions,” he stated. “In fact, it generates over $1.7 billion per year from net interest revenue, almost three times what it makes on trading commissions.”
For this issue, Nash looked to an equity-research report issued by Raymond James (RJF) analysts, who explained: “We now understand why Charles Schwab is so excited about the upcoming launch of Schwab Intelligent Portfolios (SIP), the firm’s ‘robo-advisor’ offering.”
With a large percentage of managed account assets that can be swept to its bank, “Schwab stands ready to generate substantial revenue from the product despite not charging any advisory fees. From the client’s perspective, however, the potential performance drag from such a high cash allocation may easily exceed the management fee savings relative to competitors,” the analysts explained.
In addition to the Wealthfront criticisms, rival Hedgeable posted its own blog taking the Schwab robo-offering to task.
“Regrettably, this promising program has turned out to be a lot of smoke and mirrors — fittingly reminiscent of its logo,” said Shane Hampton, whose LinkedIn profile lists him as an investing samurai at Hedgeable.
Naturally, Schwab didn’t take these criticisms lightly.
“There’s no right or wrong answer to how much cash an investor should hold as an investment; it is a strategic decision,” the firm said in a blog response to Nash. “But given our analysis of historical returns, coupled with an understanding of the importance of risk management for the majority of investors today, we’re confident in an approach that includes cash.”
As for fees, Wealthfront’s clients with at least $10,000 in assets pay 25 basis points a year and underlying ETF operating expense ratios. “That’s less money going to work towards their future, a true drag on performance. The advisory fees charged by Wealthfront are ‘sunk costs’ for investors. By contrast, Schwab Intelligent Portfolios charges no advisory fees – an investor pays only the operating expense ratios on the underlying ETFs,” Schwab explained.
Schwab is hosting calls for its advisors regarding its robo-offering this month and plans to roll out a version for advisors to share with their clients in the second quarter.
While there seems to be a good amount of investor interest – Schwab says it has received calls from about 28,000 prospects – a lot of questions remain for advisors, investors and the industry.
According to Hedgeable’s Hampton this debate is beneficial. “More than anything, it signals that the customer is winning,” he said in his blog.
Fees should continue to come down, transparency should keep increasing, and innovation is likely to proliferate — and “all of this is a win for the customer,” Hampton noted.
Bernie Clark, head of Schwab Advisor Services, painted a similarly upbeat view of the issues in an email to advisors this week: “I believe Institutional Intelligent Portfolios can play a valuable role in serving more clients in a scalable way, while complementing the invaluable wealth management services and client experience you already provide,” he said.
With industry giant Vanguard poised to expand its pilot program, which combines automated investing and human-based advice for a charge of 0.30%, later this year, Schwab is under tremendous pressure to give investors advice that is both inexpensive and valuable.
As Michael Kitces, director of research for Pinnacle Advisory Group, observed recently, “It will be interesting to see if any other large platform can find a way to compete with the [Vanguard] price point, including advisors themselves.”
— Check out Schwab’s Robo-Giant Unleashed: Could It Help Advisors Gain Clients? on ThinkAdvisor.