Robo rumpus gets vicious

The battle between Charles Schwab & Co. and its robo rivals is getting ugly. What started earlier this week as a tete-a-tete between Wealthfront and Schwab has grown in scale and significance as other online advice platforms — namely Betterment and Hedgeable — have jumped into the fray by taking Schwab to task over the launch of its retail robo-adviser, Schwab Intelligent Portfolios. "They have the market all wrong, this isn't what the public is looking for," said Mike Kane, chief executive of Hedgeable, referring to the ads the company is airing on television and in train stations. "We think the clients are going to push back and continue to seek solutions. At the end of the day, Schwab is doing work for us." The launch of Schwab's new platform, nicknamed Blue by the company, ignited a no-holds-barred brawl among robos and the discount broker. For its part, Betterment took its beef against Schwab Intelligent Portfolios directly to investors. "You, the individual investor, are paying a hidden fee via the cash allocation you are forced to hold . . . With an automated, enforced cash allocation such as Schwab's, you will never be able to withdraw just the cash if a rainy day does come, wrote Dan Egan, the company's director of behavioral finance and investments, on its website. Wealthfront chief executive Adam Nash led the digital smackdown against the new robo Monday with a post saying Schwab is deceiving investors by promoting its platform as free. Mr. Nash wrote, "Charles Schwab initially set out to be different than Merrill Lynch. But today, Charles Schwab has become Merrill Lynch. And despite being 3,000 miles away, Wall Street has seeped into every fiber of the company." In his post, Mr. Nash claimed Schwab's new platform, which allows consumers to manage, monitor and rebalance their portfolios online, isn't free as advertised. He said it will cost consumers thousands of dollars in opportunity costs related to high cash allocations and expensive "smart beta" exchange-traded funds, many of which are proprietary or "from issuers that pay Schwab to use them." Those costs, he said, are buried in mounds of disclosure documents. He cites the company's SEC filing, which stated that each investment strategy will include a sweep allocation. In this sweep program, the filing states that 6% to 30% of an account's value will be held in cash and cannot be eliminated or used by consumers for investments.

Sad to see Schwab being greedy. As a 20+ year Schwab customer, I'm now moving more money to #Betterment... http://t.co/gOI0YfThUj

— Dave Mauder (@DaveMauder) March 12, 2015

On Tuesday morning, Schwab responded, with a blog post of its own, in which it defended its platform and called Mr. Nash's post "misleading." It countered that cash should be looked at as an investment and not as a source of revenue for the firm. Schwab took exception to an example Mr. Nash used in his post, in which a 25-year-old making $65,000 and saving 10% annually could miss out on an extra $138,000 in retirement savings due to a 6% cash allocation in Schwab's program. Mr. Nash's post went on: "At 30%, it's almost criminal. The same 25-year-old might be deprived of over $573,000 when she retires at 65." Schwab pointed out that the situation was hypothetical, but regardless, cash exposure would be appropriate if that 25-year-old needed money in a few years' time. Cullen Roche, founder of Orcam Financial Group, an advisory firm in San Diego, understands why Schwab wants investors in its new platform to hold cash. But, he says, they should not have made it a mandatory requirement. "The trouble with Schwab Intelligent Portfolios is they don't give the client the ability to remove the cash position, so they created their own public relations problem," Mr. Roche said.

Here's my problem with the Charles Schwab robo platform. They should at least give people the option to opt out pic.twitter.com/2xWZbPuzR3

— Ben Carlson (@awealthofcs) March 10, 2015

Mr. Roche also said that if this was six years ago when the markets crashed, the cash option would look a lot better. "There's more to this argument than the smaller robo-advisers have presented," Mr. Roche said. According to Mr. Nash, Schwab's entrance into the online automated investing industry is a direct result of Wealthfront's growth, which recently hit $2 billion in assets under management. Meb Faber, co-founder and chief investment officer of Cambria Investment Management, wrote in his own post about the situation that Wealthfront and Schwab had gotten into a "catfight" and that the exchange between the two companies was "weird and somewhat embarrassing." "They are really on the same side and it should be a rising tide for both," Mr. Faber wrote. "In my mind, they should be cheering each other on against the high-fee crowd, but they're not, which is a shame." Mr. Nash had said in his post that Schwab was straying from its original values. "When I joined Wealthfront, I held up Charles Schwab as an example of a different type of company, a company with values to which we might aspire," he wrote. "You can understand why it's disheartening to see those values broken. That Charles Schwab is gone." Schwab accused Mr. Nash of trying to protect Wealthfront against competition. "Adam wishes he could build a moat around Wealthfront and protect it against competition," according to Schwab's post. And yet, the smaller start-ups aren't so sure there will be too much competition. "The start-ups are winning," Mr. Kane said. "We are winning. Wealthfront is winning. Betterment is winning." Schwab expects to release an adviser version of its online platform in the second quarter.