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Schwab Goes 'Robo' with Intelligent Portfolios

Charles Schwab Corp. (SCHW) recently launched its much anticipated entrée into online financial advisor — or robo-advisor — marketplace. Schwab Intelligent Portfolios are positioned to go head to head with established robo-advisor firms as well as other major financial services firms already in the space.

Here are a few thoughts about Schwab’s new service.


Schwab Intelligent Portfolios have a low $5,000 minimum investment, they carry no management fees, investors will not incur any direct transaction costs and there are no account fees.

Schwab Executive Vice President Naureen Hassan said: "We don’t view this as service for young people getting started. This is appropriate for a pretty wide range of investors … this isn't just for millennials." She noted that Schwab Intelligent Portfolios is the only major online service with no fees.

Intelligent Portfolios will be powered by algorithms using exchange-traded funds (ETFs) across 20 different asset classes, as well as a cash allocation invested in a bank account at a Schwab-affiliated bank. A significant percentage of the ETFs will utilize a Smart Beta investing approach. (For related reading, see:Smart Beta ETFs Strategies .)

The Schwab Intelligent Portfolios are bit different than other robo-advisor models in that they will allocate as much as 48% of an investor’s portfolio five Schwab ETFs based on the fundamental indexing approach of advisor Rob Arnott. The service will utilize model portfolios for investors based upon their goals and risk tolerance.

Additionally each of the portfolios has a significant allocation to cash via Schwab’s affiliated bank. The allocation would range from 7% for a 30-year-old investor to 15% for a more conservative 65 year-old investor. The cash allocations have initially drawn a skeptical reaction from some financial advisers.

While there will be no fees for the service, Schwab will make money from the expense ratios of the ETFs, as well as the money invested via the Schwab affiliated bank. (For more, see:How Technology Helps Financial Advisors .)

Competing Against Robo-advisors

Between their low minimum, no fees and the fact that Schwab represents an established financial services firm with proven technology expertise Schwab’s Intelligent Portfolios are a formidable competitor for the major players in the robo-advisor space. Add to this Schwab’s marketing muscle and it's likely that they will attract a fair amount of assets and help retain accounts that might have migrated elsewhere. (For related reading, see:A Guide to Choosing the Best Robo-advisor .)

Strong, well-capitalized firms like Betterment, Wealthfront and Personal Capital will be in the best position to compete with Intelligent Portfolios, but Schwab’s entrance could put pressure on some of the smaller players in the robo-advisor space.

Over the years the financial services industry has consolidated and many firms have merged or gone out of business. Those old enough probably recall T.V. commercials from the likes of Dean Witter, Paine Weber, and EF Hutton. Likewise in the banking industry with its many mergers, acquisition and name changes. Given the history, it's probably a good bet that the robo-advisor space will see consolidation as it evolves and matures. (For a list of robo-advisors, clickhere .)

Courting Financial Advisors

Coupled with their launch of Intelligent Portfolios for individual investors, Schwab’s Executive V.P. of Advisor Services Bernie Clark has sent a letter to financial advisers who custody with Schwab indicating that their RIA-specific automated service — Institutional Intelligent Portfolios — will be launched in the second quarter of 2015. Quoting from Clark’s email:

“We have been working closely

with advisor groups over the past year to shape the design of our offer so that it meets those needs. Institutional Intelligent Portfolios will allow advisors to modify asset allocations and customize portfolios from a pool of eligible ETFs. Advisor pricing options will be available, including one with no program fee, and the solution will allow advisors to apply their firms’ branding to the platform.”

This is huge in that Schwab in many ways pioneered the advisor custody model and assets managed by independent advisers are a huge part of their overall asset base. This allows financial advisers who custody with Schwab to compete for business with investors who may fall under their normal minimum and to cultivate these emerging clients as their firm’s target clients of the future. Further, it helps keep assets at Schwab from those advisers who want to be in the robo-advisor space. (For related reading, see:Trends Challenging Financial Advisors .)

Competing with Vanguard and Fidelity

Schwab’s entrance into the robo-advisor space comes a bit later than competitors Fidelity Investment and Vanguard Group.

Fidelity has forged a partnership with Betterment to offer their services to advisers who custody with Fidelity. This provided Fidelity with an instant robo-advisor platform to offer financial advisers to allow them to compete for business from Millennials and other emerging investors. In addition to their arrangement with Betterment, Fidelity recently announced a partnership with robo-advisor LearnVest as well. (For related reading, see:How Financial Advisors Can Adjust to Robo-advisors.)

Vanguard’s robo-advisor platform uses in-house financial planners and advisers and is a good example of how human and Robo Advisors can work together for clients. Assets have grown considerably over the past couple of years. Reports indicate that Vanguard is considering offering a version of this service to financial advisers as well. Vanguard freely admits that the service often recommends the implementation of their recommendations via their own mutual funds and ETFs.

One, again, has to wonder if there will be a shakeout in the robo-advisor space with the likes of several of the major financial services firms and a few of the stronger robo-advisors as the survivors. (For related reading, see:Robo-Advisors and a Human Touch: Better Together? )

The Evolution of Robo-Advisors

Does the launch of Schwab’s Intelligent Portfolios, to be followed by the institutional version of the service, mark the beginning of the next step in the robo-advisor space?

Schwab, Fidelity, Vanguard, TD Ameritrade and other big players now have a foothold. These firms are well-capitalized and have excellent capabilities in technology. Moreover, they are big, recognizable brand names, and like any other product this will in and of itself attract a lot of attention. (For related reading, see:Is an Online Financial Advisor Right for You? Your Client? )

Certainly Wealthfront, Betterment, Personal Capital and a few other robo-advisor have gained market share and have the funding to compete. Others may end up falling by the wayside.

The Bottom Line

Schwab has just launched its much anticipated entrée into the robo-advisor space. The initial version is geared towards investors directly, they will be following up with an institutional version geared toward the financial advisers who custody assets with Schwab. Schwab is a large well-known brand name in the financial services space and their Intelligent Portfolios could be a game-changer in the still-new robo-advisor space. Stay tuned, as only time will tell. (For related reading, see:7 Steps to Evaluate a Financial Adviser .)

Category: Advisor

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