Wealthfront CEO accuses Schwab of deceiving investors with 'free' new robo

As Charles Schwab & Co. unveiled its automated investing platform to consumers this week, Wealthfront chief executive Adam Nash, whose company competes directly with the new service, openly accused the discount broker-dealer of trading in its values for profits and purposely deceiving investors by promoting its platform as free. In a blog post Monday, 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." Mr. Nash claims Schwab's new platform, Intelligent Portfolios, 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. 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.

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. Nash also charged the company with 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." Mr. Nash said Schwab's entrance into the online automated investing industry is a direct result of Wealthfront's growth, which hit $2 billion in assets under management last week. "I think in 2015, you're going to hear a lot about Wealthfront versus Schwab because you're talking about the leader from one generation entering a market against a leader from a new generation," Mr. Nash said in a phone interview. "We have no doubt if Wealthfront didn't exist … Schwab wouldn't be rolling out this service." Mr. Nash commended Vanguard, which rolled out its own robo-adviser for consumers in 2013, for "retaining [its] integrity." Schwab accused Mr. Nash of trying to protect Wealthfront against competition, something TradeKing Advisors had warned Wealthfront and Betterment about in a letter last week. "Adam wishes he could build a moat around Wealthfront and protect it against competition," according to Schwab's post. "But misrepresenting facts isn't the way to do that." Some who heard the news of Schwab's Intelligent Portfolios said it doesn't compete with Wealthfront because of Wealthfront's specific niche with millennials. Bill Doyle, a principal analyst with Forrester Research, said Wealthfront won't be affected by Schwab's new platform. "Wealthfront is one of the smart ones and they are obsessively focused on millennials," Mr. Doyle said. "Schwab isn't doing that. Schwab has a broad gauge approach." Others tweeted that Schwab was joining a pool of robo-advisers.

@CharlesSchwab launched its answer to @Betterment and @Wealthfront today https://t.co/AqLlOaCil4 #fintech #invest

— Xavier De Pauw (@XavierDePauw) March 9, 2015

Schwab expects to release an adviser version of its online platform in the second quarter.