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Schwab’s Advisor Robo-Platform Offers 200 ETFs, 28 Asset Classes

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Charles Schwab on Monday announced details of its Institutional Intelligent Portfolios (IIP) robo-advisor offering in a webcast with more than 3,100 of its RIA clients. The advisor version of the platform will offer more than 200 ETFs, including some Schwab-branded ETFs, will require a 4% cash stake in each portfolio, and will be free to RIAs who custody more than $100 million at Schwab Advisor Services—those with less than $100 million will pay a 10 basis point fee to use IIP.

End clients will pay the individual ETFs’ operating expense ratios (OERs) and advisors will set their own management fees, billed through Schwab’s standard custodial billing process. Otherwise there will be no addition account servicing, commissions or custody fees charged to end clients, the company said in a statement. 

The Institutional version of Schwab’s robo-advisor offering is on track to be released in the second quarter of 2015, Schwab confirmed. Schwab’s retail version of their new robo-advisor platform, Schwab Intelligent Portfolios (SIP), was released eariler this month.

In an interview on Friday, Schwab Advisor Services’ head Bernie Clark said IIP will be white labeled for advisors—“their brand, their color; our name will be there because we’re the broker-dealer”—and will be available to end clients through “an advisor portal that clients can go to,” using Schwab Alliance, the company’s website for advisor clients, or through Schwab’s Mobile Connect app.

“It’s built for the advisor so their client can have a paperless account opening,” though the advisor can also “co-browse” with clients, and provide access to portfolio performance reporting if they wish, with client data feeds going into Schwab’s Advisor Center. 

“The advisor can have as much interaction with the client as they want or need,” Clark pointed out, perhaps depending on client account size, reflecting Schwab’s desire to allow advisor users of IIP to choose their own level of engagement with clients or prospects who want a digital advice service, based on each advisor’s own business models and preferences. 

However, Clark argued that even advisors who don’t avail themselves of a digital advice offering will need to have a “strategy for why they’re not building it into their model,” saying that it’s not only clients but the next generation of advisors already in RIAs’ offices who will find it “quite natural” to have a digital advice offering.

Clark said research from Schwab (SCHW) shows that 56% of advisors think a digital advice offering “should supplement what they offer; 80% are already serving clients below their minimums.” Clark argued that an “automated investment management” offering will “help existing firms to expand, to serve existing clients” and will be “transformative for the industry: it will be the price of entry for Generation Now and for generations to come,” because of the “convergence” between “technology and relationships.”

Clients and prospects from younger generations “want instant access,” Clark said, but also “someone to help them.”

Like its retail version, clients of IIP have a $5,000 minimum account opening size, can avail themselves of automated rebalancing at that asset level, and at the $50,000 level can take advantage of automated tax loss harvesting on the portfolios.

While advisor clients will interact with the advisor in the normal course of events, there will also be a “dedicated help desk” available by telephone or online staffed with specially trained Schwab personnel who can provide technical support to IIP clients: “they’ll be well versed in the technical challenges,” Clark said.

Again like the retail offering, IIP will allow advisors to create clients out of a wide range of ETFs, though no actively managed, inverse or leveraged ETFs will be available. Of the more than 200 ETFs on the platform representing 28 asset classes—Schwab has not yet released the specific funds—100 will be “the most popular ETFs” among advisors, Clark said. They will include some Schwab-branded ETFs, along with others, including ones from Vanguard and ETF Source.

There will be no requirement to include Schwab ETFs in the portfolio, Clark said, though there will be a minimum 4% cash held in an FDIC-insured account at Schwab Bank, paying “an indexed, market-based interest rate.”

When asked why there will be such a cash minimum, Clark first said that at Schwab, “we believe cash is one of the best insulators from market movement. It doesn’t correlate to other asset classes,” and provides the “best defense against downward” market movements.

In IIP, “the advisor is the fiduciary,” Clark said, so the 4% minimum in cash “supports liquidity.” Clark said Schwab’s data shows that its advisors have an average 6% to 7% in cash in client portfolios already, though he admitted that the cash requirement “supports the platform” and that Schwab does receive “the spread on the cash” at Schwab Bank.

Clark also said that “ballparking,” some 60% to 70% of Schwab Advisor Services RIAs have less than $100 million custodied at the firm. “We do think 10 bps is incredibly aggressive and competitive,” said Clark of the platform fee.

When asked why Schwab decided to build the retail and IIP platforms, Clark said that while “we often partner” on technology offerings, “this was such a big opportunity that we didn’t want to compromise. It could become core to our retail business and our advisor business,” so Schwab wanted to bring Intelligent Portfolios “to market in a non-compromised way.”

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