RIAs see new competition from Schwab subscription pricing

Some advisers are confident they can provide enough value to justify their fees

Apr 4, 2019 @ 4:59 pm

By Ryan W. Neal

When Charles Schwab announced it would switch to subscription pricing for its robo-adviser, some financial advisers saw new competition for retail assets.

For only $30 per month, Schwab Intelligent Portfolios Premium clients will get automated investing and unlimited access to a certified financial planner. For clients with at least $125,000 invested, that's even less expensive than the 28 basis points Schwab currently charges for the hybrid robo-adviser and far more affordable than the 1% fees many advisers charge.

(More: Schwab moving to subscription fees could be watershed moment for advice industry)

"Schwab has outright acknowledged that they're going for mass affluent investors themselves, implicitly in competition with their RIAs serving the same market," said XY Planning Network co-founder Michael Kitces on Twitter.

On his blog, Mr. Kitces pointed out that many RIAs thrive serving the mass affluent market, making Schwab's robo "more of a head-to-head competitor with the typical RIA than the typical wirehouse."

This is hardly the first time Schwab has caught heat from advisers for decisions made in the retail brokerage business. Advisers bemoaned "increased competition" when Schwab launched its franchise business, as they did when it first announced its digital advice platform in 2014.

(More: Schwab tells advisers its online advice platform won't be a threat to RIA biz)

For some RIAs, it's reason not to custody assets with the firm.

"Why would any RIA custody at Schwab?" tweeted Jorge Romero, a senior wealth adviser with Carson Wealth. "Seems to me that out of the big four, they're the one who is most actively competing with their RIAs."

"Don't get me wrong, their new service is good for lots of investors, but don't think for a second that Schwab wouldn't undercut traditional RIAs by targeting mass affluent, HNW clients," Mr. Romero added.

Kyle Moore, founder of Quarry Hill Advisors, argued that advisers shouldn't feel threatened as long as they offer clients more value than they can get from the hybrid robo adviser.

"Maybe I should feel threatened but I don't. Just like how I don't feel threatened by the wirehouses," Mr. Moore said.

Schwab can offset the low cost of it's hybrid robo service with revenue generated by cash sweeps and by using proprietary exchange-trade funds in portfolios. But traditional RIAs can't, and firms would have to achieve a significant size in order to meet Schwab on cost.

Julianne Andrews, co-founder and principal of Atlanta Financial Associates, estimates that a CFP would have to serve roughly 400 households in order to break even with compensation. Though her firm, which transitioned to the RIA space last summer and uses Schwab as its sole custodian, is considering launching a digital adviser, Ms. Andrews is realistic about trying to compete with a giant like Schwab.

"We're going to have to be very clear about the value we bring to the table," Ms. Andrews said. That means offering more interaction and higher quality services than investors can get from a robo.

What concerns her more is how a product like Schwab's sets the value for CFP advice for consumers.

"We're going to have to make the distinction early that an 800 number to talk to a CFP you've never met before is very different than working with your friend at Atlanta Financial," she said. "When you pick up the phone and talk to this particular person that you've talked to before, that's where the distinction will be."

Schwab senior communications manager Marianne Ahlmann said the firm isn't hearing many complaints from advisers, just questions.

"We view RIAs as the best solution for investors who have more complex, specialized needs and prefer an ongoing relationship, often with in-person interactions," Ms. Ahlmann said in an email.

As it has in the past, Schwab will also refer clients to RIAs if they need deeper or more sophisticated advice than the robo platform can offer. Ms. Ahlmann said Schwab referred $11 billion in assets to RIAs in 2018, a 41% increase from the year before.

Scott Bishop, executive vice president of financial planning at STA Wealth (which custodies assets with Schwab and Fidelity), says he isn't concerned about the platform or the new pricing as competition.

"I offer high-end customized and comprehensive financial planning and do not see the automated planning that Schwab can give at scale a threat to me and my practice," Mr. Bishop said.

The firms that should be worried are the ones who only offer minimal services, he said.

Other advisers are sick of the debate.

"I'm so tired of this. Keep your head down, do the right thing, add massive value, be transparent, work with people who have problems you can solve," tweeted Taylor Schulte, founder of Define Financial. "If you're business isn't growing, it's your fault, not Schwab's."

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