Charles Schwab to launch free 'robo'-adviser next quarter

Low-cost site will be available to advisers in a white-label version later next year

Oct 27, 2014 @ 11:49 am

By Mason Braswell

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Launching its own online advice platform, Charles Schwab & Co. Inc. is aiming to make low-cost, web-based advice even cheaper in the latest development in the quickly evolving business, but some industry watchers say it could rankle advisers who custody assets with the firm.

The discount brokerage pioneer's new Schwab Intelligent Portfolios, which is set to launch next quarter, will be available free of charge to investors with $5,000 or more to invest, will include 24/7 support from a licensed representative and will be white labeled to investment advisers who custody assets with Schwab later next year, the firm's chief executive Walter Bettinger said Monday in an investor presentation.

“This could be pretty disruptive to the market,” said John Furey, a consultant to investment advisers and founder of Advisor Growth Strategies. “It should be competitive with the other providers emerging out there.”

William Trout, a senior analyst with Celent's wealth management unit, said the product could be disruptive to investment advisers who custody with Schwab because even if the service appeals to a mass affluent clients who may not need a full adviser relationship, it is likely to put additional pressure on advisers to drive down their fees.

“Schwab's decision to offer its platform to consumers for free is unlikely to go over well with its captive network of adviser,” he said. “The big issue, of course, is that the Schwab move puts downward pressure on RIAs' relatively high fees, even if the RIAs say they are offering a better, more personalized service.”

It will also add pressure to existing online advice providers, he added.

“Schwab's decision to offer direct-to-consumer portfolio management services via algorithm for free is a troubling sign for an industry already offering door buster fees,” he said. “We may be seeing the acceleration of a race to the bottom in terms of pricing, with the end result being 'curtains' or at least consolidation for many of today's crop of automated advisers.”

The announcement comes on the heels of several other providers and custodians announcing their own strategies in the space. Last week, Tom Nally, president of TD Ameritrade's institutional business, said his firm would be providing access to some robo advisers through its trading platform. He said that the firm opted against developing its own because it did not want to confine advisers to one choice.

Fidelity Investments has partnered with another player, Betterment, to refer client assets to its online advice platform, which charges a 25 basis-point fee.

Most of those so-called “robo” services charge between 15 and 35 basis points as a portfolio management fee on top of the internal expenses related to the underlying funds.

Schwab, however, said that it will receive revenue from the underlying exchange-traded funds and any banking products associated with the account. All the ETFs on the platform, however, will have to meet various institutional screening criteria, according to Mr. Bettinger.

The online advice platform will not charge investors additional portfolio management fees, a commission for the trade or account service fees, which Mr. Bettinger characterized as “economically inefficient.” Investors will only pay the expenses related to the investment funds themselves, he said.

“We began quite a while ago to build from scratch what we consider to be the premier online advice solution that best leverages technology, asset management and diversification,” Mr. Bettinger said. “This is a much more sophisticated advisory program than we have seen so far in the market.”

(Read more: Schwab preps robo offering)

Tax-loss harvesting features will be available for investors with at least $50,000.

Executives were quick to allay fears of competition between the new service and RIAs on Schwab's platform.

Mr. Bettinger said he had “meaningful interest” from the roughly 7,000 advisers who custody with Schwab in acquiring their own version of the software. Advisers will be able to apply their own branding to web and mobile applications and customize the portfolios from a pool of available ETFs. The firm said pricing would vary for the white labeled offering, but a free version without a management fee would be available.

“Granted there is access to people 24/7, 365, but to a greater extent it will appeal to people less interested in a relationship-driven model,” Mr. Bettinger said.

Naureen Hassan, senior vice president at Schwab Intelligent Portfolios, said the firm delayed rolling the product out to investment advisers because the RIA platform had to be customizable and was more complicated. Earlier this year, Ms. Hassan moved from another role as head of client experience in Schwab's RIA custody business to help develop the online advice platform.

“It offers RIAs the ability to have a scalable solution for their next generation of clients, their lower asset balance clients,” she said.

Advisers who have client assets at multiple custodians in addition to Schwab will also be able to white label the robo service, provided that the assets are still held at Schwab.

Ms. Hassan said most of the work on Schwab Intelligent Portfolios was done over the course of the past year but declined to provide specifics on how much money the firm invested in the new technology.

Mr. Bettinger, however, declined to say who would be a direct competitor to the robo-advice offering, and said it could even lure in clients from major brokerage firms who may be seeking more value.

“Over time the competitive set with online advisory is any other form of investing,” he said. “It could be people that today receive advice from a wirehouse and question the value of that relationship and its economic value.”

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