The emerging movement toward software-driven “robo-advisors’’ will get a big push forward, as Charles Schwab & Co. (SCHW) launches its own version of the low-cost, lower-service financial-advisory service.
Schwab Intelligent Portfolios will offer a white-label version to registered investment advisors to resell, Schwab says. The company says it will not charge for the use of the software advisor, but will make money selling exchange-traded funds the software recommends.
“Schwab Intelligent Portfolios is designed to address a growing demand for affordable, objective, sophisticated and convenient investment advice,” said Schwab President and CEO Walt Bettinger in a statement. “While [they] will be very accessible, with a low account minimum, the combination of a simplified client experience with highly-sophisticated portfolio construction makes it appropriate for a wide range of investors, from those just getting started to those who have accumulated more wealth, but prefer a technology-powered approach to investing.”
With as little as $5,000, investors will be able to open individual, joint, IRA, and revocable living trust accounts that offer technology-driven automated portfolios and a modern, streamlined client experience designed for ease and efficiency.
A Crowded Space
The robo-advisor field has been pioneered by startups like Betterment, Personal Capital and Wealthfront, which between them have raised $275 million in venture capital, according to TechCrunch.com. Wealthfront is the largest and best-funded, having raised $129.5 million from investors including Index Ventures, a firm best-known for investments in Facebook, Dropbox and Etsy. Personal Capital is run by former Intuit CEO Bill Harris, and has raised $104.3 million.
The products are designed to determine an individual’s risk preferences from a very short series of questions asked online, and to recommend standardized baskets of financial ETFs based on the answers, in a process that can be completed within a few minutes. (For related reading, see: How Advisors Can Help Clients Stomach Volatility.)
At Wealthfront, initial screening consists of only four questions – the prospective client’s age, amount of liquid assets, whether the client is more interested in building wealth or preserving capital, and whether the client would sell, buy or hold assets amid a stock-market decline of 10% or more. The software then recommends an asset-allocation portfolio consisting of about six exchange-traded funds, selected to balance low costs with the level of risk appropriate to the client.
The startup robo-brokers charge management fees of 0.15 to 0.35% of a client's assets each year.
Analysts at Forrester Research and MyPrivateBanking Research say robo-advisors are likely to appeal most to young investors in the so-called millennial generation, born after 1980. The idea is that the new services will disrupt existing discount-investing alternatives using technology, in much the same way Schwab and others deregulated full-service brokers after the securities brokerage business was deregulated in the 1970s, with investors who have little experience with old ways of doing business being the earlier adopters. (For related reading, see: Retirement Planning the Millennial Way.)
But many RIAs may choose to use the robo-based services as part of their own offerings, analysts say, especially for younger clients and smaller accounts.
“Though robo-advisors are only just getting started [...] their presence is likely to be the cause of severe turbulence for traditional wealth managers,” the firm says. “There are already sensitive areas where robo-advisors have clear advantages in attracting clients. These include low fees, attractive self-assessment tools, rapid enrollment and the widespread availability of portfolio rebalancing. The opportunities and the dangers presented by robo-advisors to conventional wealth managers can be summed up in the single word ‘technology.'” (For more, see: Financial Advisors Need to Seek Out this Group NOW.)
A Huge, Untapped Market
Robo-advisors will have about $14 billion under management by the end of the year and grow to $255 billion by 2019, MyPrivateBanking Research estimated. That’s still a small portion of the $5 trillion of U.S. assets conventional wealth-management firms direct, the report says.
Schwab’s service will be available online and via smartphone applications. Like its startup rivals, it will offer diversified portfolios of exchange traded funds, with portfolio management provided by Schwab’s $20 billion portfolio advisory arm.
Intelligent Advisors will give access to about 20 asset classes around the world, including stocks, bonds, real estate, and commodities. It will also offer FDIC-insured bank accounts. Its software will automatically rebalance portfolios to keep them consistent with clients’ investment strategies. It will also automatically make trades to capture available tax losses, at no cost to clients with at least $50,000 invested. (For more, see: Money Habits of the Millennials.)
The service includes live help from investment professionals if needed, Schwab said.
Why Schwab Chose DIY
Schwab’s strategy of building its own robo-advisor differs from its rival Fidelity Investments, which has partnered with Betterment to offer a robo-advisor service.
TD Ameritrade is working to make robo-advisor services and tools available to RIA firms, spokesman Joe Giannone said. The company lets RIAs use its Veo custody and brokerage platform through third-party technology firms, he said
“We believe robo-technologies offer traditional human advisors an opportunity to provide their services to a broader arrange of investors (not just high net worth),” he said in an e-mail.
Bettinger said the new robo-advisor is part of Schwab’s ongoing commitment to provide quality investment advice to a broad spectrum of investors.
“We’ve seen strong growth in our traditional advisory solutions as more investors have sought out professional investment advice, and we believe there will always be people who prefer a relationship-centered model,” he said. “Schwab Intelligent Portfolios will make investing accessible to a broader group of investors who […] prefer the power of technology to enhance and simplify their lives.” (For related reading, see: How Financial Advisors can Adjust to Robo-Advisors.)