Charles Schwab became the first custodian to release its own automated asset allocation platform for retail investors on Monday. The launch of Intelligent Portfolios ignited a debate over Schwab’s “no fees” claim and the impact the so-called “robo-advisor” would have on the financial technology sector as a whole.
Perhaps the loudest reaction came from Adam Nash, who felt that Schwab’s Intelligent Portfolios platform was designed to directly compete with his own Wealthfront service.
In a personal blog post on Medium, Nash accused Schwab of abandoning its founding values by deceiving investors. Nash took issue with Schwab promoting its “robo-advisor” service as free, arguing that portfolios with high cash allocations and “smart beta” ETFs will actually cost investors thousands in the name of generating revenue for Schwab.
For too long, companies like @CharlesSchwab have padded their pockets at the expense of investors. It has to stop. pic.twitter.com/nUEYwruRpP
— Adam Nash (@adamnash) March 10, 2015
“I think this industry has gotten a little too complacent and has rationalized this idea of being very clever about fees and monetization, and I think this industry makes too much money at the expense of the small investor,” Nash told WealthManagement. He added that millennials are wary of hidden fees and "gotcha-based pricing," and some younger advisors added that it's a reason they prefer to work with robo-advisors.
Gen X & Y don't trust banks or financial firms. They will see right through Schwab's "free" Intelligent Portfolios.
— Blair H duQuesnay (@BlairHduQuesnay) March 10, 2015
Schwab Responds
Schwab responded Tuesday morning with a blog post of its own, arguing that cash is a reasonable investment, especially when the Federal Reserve raises interest rates and the bull market ends. Schwab disputed the examples used by Nash, defended the use smart beta ETFs, and said the interest earned by cash allocation is paid to investors.
“Adam wishes he could build a moat around Wealthfront and protect it against competition,” Schwab said. “But misrepresenting facts isn’t the way to do that.”
Opinion was divided in the financial tech community, and many took to Twitter to defend or dispute the claims made by both sides.
@JimLudwick @adamnash Intelligent Portfolios customers don't pay "hidden fees," but they do encounter significant opportunity costs.
— Bill Winterberg CFP® (@BillWinterberg) March 10, 2015
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
Joel Bruckenstein, a financial technology analyst and founder of the Technology Tools for Today conferences, said it might be a good thing to use cash allocations and smart beta ETFs in the current U.S. market, but that only time will tell. What is more important, Bruckenstein said, is the impact Intelligent Portfolios can have on financial tech as a whole, an opinion shared by several online.
“I’m not sure Nash is wrong, but I’m not sure he’s right either,” Bruckenstein said. “I think overall, providing a low-cost alternative for the end advisor and the end investor is a thing. I think this is competition and competition is good. I think Schwab has a trusted name in the industry and that gives them a leg up.”
The truth is, Schwab Intelligent Portfolios and Wealthfront are great products. These aren't the bad guys in the fin industry....
— Cullen Roche (@cullenroche) March 9, 2015
It's About Transparency
Brad Matthews, CEO of Trizic, agreed cash could counterbalance volatility even if it isn’t the best way to make money for clients. Profiting from interest is common practice in finance, Matthews said, and the key is to be transparent.
“What consumers are looking for is how their money is being invested,” Matthews said. “I was in banking and wealth management for a long time and a lot of the revenues that come from banking are from the spreads and interest margins.”
But Nash argued that this “business as usual” mentality is precisely the problem and that Schwab has been public about how profitable the banking business is. He also disagreed that that Schwab is being transparent.
“I think being transparent with industry insiders is not the same as being transparent with your customers,” Nash said. “There’s an entire website that walks through [Intelligent Portfolios] in detail, and I don’t think most people understand how Schwab makes money off that service.”
Aaron Klein, the co-founder and CEO of Riskalyze, said that arbitraging interest rates is the same as charging a fee and agreed that Schwab should be more transparent about it, but that it ultimately becomes an argument over semantics. What is more important is the value that the product brings to investors.
“The time for lower-cost, automated investing services has come,” Klein said, though he thinks investing is done best with a human advisor. “The answer isn’t to pretend [robo-advisors] don’t exist, but to look at the underlying benefit that is there.”
Daniel Satchkov, president of RiXtrema, added that a product like Intelligent Portfolios was inevitable. Even if Schwab isn’t totally free, he said products that rely on computer calculations are inherently low cost and move towards free over time. This creates the opportunity for other robos to develop more premium services.
“Schwab will probably very quickly collect more assets than everyone else combined, but there will still be users who will stay with the others for their user experience,” Satchkov said. Robos are still focused on risk-based asset allocation, and there is room to add financial planning services, risk control mechanisms and more tax harvesting features.
“User experience is not static, and at larger places that tends to be difficult,” Satchkov said. “Wealthfront and betterment are better positioned to be fluid.”
Niko Karvounis, co-founder and chief stratefy officer of financial data aggregation firm Quovo, said the fact that this debate was even happening proves the tools are here to stay. "The fact that they're arguing about methodology is proof that the underlying robo-model has some permanence. The debate isn't over whether or not robo-advising is valuable, it's over the "how" of its design and use. That's a powerful evolution from the days when the model itself was fundementally criticized. In that sense, Wealthfront and Betterment have already won. In some form or another, their model will play a role in the "new normal" for twenty first century financial advising."
Intelligent Portfolios launched for retail investors only on Monday, and requires a minimum investment of $5,000. Schwab plans to launch an advisor-facing version of the product in the second quarter.
