Robos need to get on the ball

The article in InvestmentNews last week, “Robo-advisers say they aren’t worried about Schwab,” certainly was curious. One of the industry’s 800-pound gorillas announces a competing service that is virtually free to consumers and they shrug it off?

Are they crazy?

Twenty years ago, when Home Depot was sweeping the land, opening hundreds of stores a year, mom-and-pop hardware retailers argued that the big-box behemoths wouldn’t affect them because they offered superior service that a business like Home Depot couldn’t match. Besides, their customers were loyal.

Well, we all know how that played out. Most of the neighborhood stores are gone while Home Depot, as well as copycats like Lowe’s, are thriving.

Stores like Home Depot are known as category killers. They dominate their industry and wipe the floor with smaller, weaker competitors. What the mom-and-pops found out — and what the current crop of robo-advisers may discover — is that price often trumps customer service, customer loyalty and just about everything else.

Let’s hope it’s just public relations spin and that robo-advisers are taking Schwab’s entrance into their sector seriously. Schwab has a number of things going for it:

First, it’s a well-known brand, much more than any existing robo-adviser. Second, there’s ample reason to believe that Schwab can come up with a product just as good as most of the robo-advisers. Much of what robo-advisers offer is based on algorithms that have been around for years. Third, Schwab intends to offer its service to investors for free, as long as they have $5,000 to invest. Robo-advisers can say they are low-cost providers, but let’s face it — what’s better than free?

If the robos are smart, they will begin coming up with concrete ways to differentiate themselves from Schwab. Their edge is that they are robo-advisers, period. Schwab has many lines of business, and that means their attention to detail in this area might not be as laser-focused as that of the robos.

Under the best of circumstances, robo-advisers are in for a tough fight. Realizing that — not minimizing it — is the first step as they prepare for battle.