Walt Bettinger boasts of 'hundreds of new accounts daily' for Schwab Intelligent Portfolios then fences with Wall Street analysts who beg details

April 24, 2015 — 9:58 PM UTC by Brooke Southall

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The new robo-advisor launched by Charles Schwab & Co. is off to a an explosive start.

The San Francisco-based broker-dealer launched Schwab Intelligent Portfolios on March 12 and it already has $1.5 billion of assets gathered, according to Schwab’s call with analysts yesterday regarding the firm’s first-quarter results. Schwab brought in $34.2 billion in total net new assets across its business lines during the three months ended March 31.

The robo-offering is winning “hundreds of new accounts” every day and it now has between 23,000 and 24,000 accounts, according to Walter Bettinger, chief executive of The Charles Schwab Corp. during the conference call. “The average account size is about $80,000,” he adds. See: A charged-up Walt Bettinger slams all non-Schwab robos at IMPACT 2014 with an energy appreciated by RIAs.

Here’s how Schwab arrived at the $1.5 billion figure: If you multiply 23,000 accounts by $80,000 — which Schwab says is the average account balance — you get $1.84 billion. Only 80% of the new accounts are funded. A Schwab spokeswoman explains that the $1.5 billion amount is derived by multiplying 24,000 accounts by the 80% that are funded, then multiplying that amount by $80,000.

Muddled metrics

To gather $1.5 billion of funded assets with $300 million more in the pipeline in just six weeks is unquestionably impressive in that it puts Schwab roughly on a par with the two robo leaders in the business: New York-based Betterment Inc. with its $1.8 billion, and Palo Alto, Calif.-based Wealthfront, with its more than $2 billion. These firms took six years to gather what Schwab did in six weeks — though they profess to seeing major accelerations of inflows themselves of late. See: Schwab’s robo launch stimulates sign-ups at Betterment and Wealthfront — and itself.

If there is a downside to this uptrend in Schwab’s robo assets, it is the degree to which Schwab is simply cannibalizing its own assets. On a number of occasions and in a number of different ways, analysts asked Schwab executives to give some sense of how many net new assets The Charles Schwab Corp. is winning with Schwab Intelligent Portfolios.

The official answer to the question was a jumble of metrics of comparisons to numbers not in evidence.

“Existing clients, in other words, people that were Schwab clients prior to the introduction of Intelligent Portfolios, they have an average asset size at Schwab that is about two times our overall retail average,” Bettinger said. “I think that reflects the fact that successful, experienced and sophisticated investors are utilizing this program. Cannibalization rates from existing clients who are already enrolled in fee-based advisory solutions, as well as asset allocation weightings between equities, both market cap and fundamental, fixed income and cash, are completely consistent with what our pre-introduction projections assumed. About two-thirds of the new-to-firm adopters of the program in these first handful of weeks are under age 45.”

Richard Repetto: We still don't have a feel for what your guidelines were.
Richard Repetto: We still don’t have
a feel for what your guidelines
were.

Cannibalization concerns

Eventually Richard Repetto, analyst for New York-based Sandler O’Neill & Partners LP, expressed his frustration with the way Schwab executives handled the question.

“I appreciate the metrics that you did give out,” Repetto said on the conference call. “But with the growth going as fast and as well as it’s going, we’re still sort of wondering about how it’s impacting on the cannibalization rate? I know you said it is in your within your guidelines, but we still don’t have a feel for what your guidelines were. And again, it’s because it is growing so fast, I think it’s an important question.”

But Will Trout, an analyst covering robo-advisors for Celent from Houston, Texas, says that Wall Styreet analysts shouldn’t preoccupy themselves with 'cannibalization.’

“If anything [should deserves the microscope], a platform like SIP will open the door to a large population of underserved customers,” he says. “These include the mass affluent segment, Millennial investors, retirees in de-accumulation mode, as well as wealthier individuals resistant to putting their eggs in one Schwab basket.

“This is to say that the low cost and scalability of automated investing platforms like SIP, combined with investors’ increasing comfort with digital technology, makes traditional servicing assumptions based on age and assets less relevant. At the same time, as customers leave digital tracks, the capture of transaction, activity-based and social data will afford more opportunities to enhance segmentation, and thus to retain and expand relationships. In short, I think Schwab’s got a winner.”

Will Trout: I think Schwab's got a winner.
Will Trout: I think Schwab’s got
a winner.

If anything, a platform like SIP will open the door to a large population of underserved customers. These include the mass affluent segment, Millennial investors, retirees in de-accumulation mode, as well as wealthier individuals resistant to putting their eggs in one Schwab basket.

This is to say that the low cost and scalability of automated investing platforms like SIP, combined with investors’ increasing comfort with digital technology, makes traditional servicing assumptions based on age and assets less relevant. At the same time, as customers leave digital tracks, the capture of transaction, activity-based and social data will afford more opportunities to enhance segmentation, and thus to retain and expand relationships. In short, I think Schwab’s got a winner.

Bettinger allowed that Schwab is facing some challenges in winning assets from non-Schwab customers but that the admixture of old and new is looking better.

“New-to-firm users make up about 20% of client adopters over the last few weeks,” Bettinger said. “This percentage is growing every week as our marketing and advertising message permeates in the marketplace and attracts more and more new-to-firm clients.” See: Trade publication critiques the inhumanity of Schwab’s robo advertising.

1,000 points of view

Analysts are also concerned about the percentage of assets in portfolios that are allocated to the high-profit-margin ETFs with so-called fundamental indexing. See: Why the whiff of another delay of Schwab’s ETF-only 401(k) plan is drawing so much attention.

Instead of answering the question, Bettinger offered a philosophical view that he attributed to others, some of whom hold doctorate degrees..

“I don’t know that we are going into that level of detail of asset allocation,” Bettinger said. “I would just say that, philosophically, our belief is that a mixture of market-cap-weighted indexing and fundamental indexing is better than exclusively following either one.” See: Why ETF sponsors are ponying up big fees to get on Schwab’s ETF OneSource in a bid for access to ticket-averse RIAs.

He continued, “And I guess when it comes to asset allocation, there are 1,000 different viewpoints and 1,000 different right answers that people have. But our view is that a mixture of the two is better than all market-cap or all fundamental. And that is the philosophy that our CFAs and Ph.Ds and experts have put together in the construction of Schwab Intelligent Portfolios.”

Chief financial officer Joe Martinetto offered hope to analysts that Schwab will be more transparent about its robo-assets in the future.

“As time goes on and we get a much better feel for it, we may consider doing more disclosure,” he said on the call. “But you just have to think carefully. We don’t want to over-rotate around intricate disclosure at one product level. It is still $1.5 billion out of $2.5 trillion.”



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