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.