Wealthfront responds with force to Schwab CEO's robo announcement

Let’s get 2 things straight.

1. Taking $100 million in VC money does not “allow(s) us to retain independence from Wall Street.” You now have owners, demanding return on investment.

2. As a follow up, not putting a dime of that $100 million to work is a terrible use of capital. How that is a point of pride or interest is beyond me. If I were an investor I would be wondering what in the world Mr. Nash is doing with my money.

Does anyone know how i can borrow some shares of this Spark Capital fund?

How can Schwab call a service that INVESTORS ARE PAYING FOR, albeit in an underhanded, under the radar way, FREE? If investors are paying, via rev share kickbacks (to Schwab) from fees on funds they’d better let investors know exactly what they are paying and what it’s for. That is NOT ' “FREE.” It’s astonishing that the spokesperson would say: “That decision is made based on objective criteria within a fiduciary standard, and it doesn’t play a meaningful role in the economics of the program.”

Really? Not meaningful to whom? IF this decision is based on the fiduciary standard then the ALL THE FEES AN INVESTOR PAYS MUST BE CLEARLY DISCLOSED TO THE INDIVIDUAL INVESTOR. And if Schwab is getting a kickback on this they’d better let the investor know, and clearly, what the individual fee is — not buried in 50 pgs of disclosure. Otherwise this would be a fiduciary breach. It is not in an investor’s best interest for fees (and whom they go to) to not be disclosed. This is, sadly, a major blunder on the part of Schwab.

To clarify, RIABiz states that Intelligent Portfolios depends on revenue sharing from funds for it’s revenue and to support the low cost. That is simply not true. The selection of the underlying funds has nothing to do with whether they are part of Schwab’s ETF OneSource program. The selection criteria are objective, they will be transparent and have to do with factors such as cost, bid/spread efficiency, etc. Underlying OERs on ETFs are there for all existing online advice platforms, but our scale and business model allows us to offer the program without fees. That’s a win for investors.

Robo-Advice as a faster and cheaper way to flip mutual funds is the established context in which “advice” is being promoted in a brokerage dominated marketplace, this type of advice is not remotely close to being advice as defined by statute .Even thought “Robo-Advice” may be better than brokerage advice products where advisors are neither accountable or have ongoing responsibilities for their recommendations it never achieves “continuous comprehensive counsel” and the “accountability” and “responsibility” required for professional standing. Thus, Walt Bettinger of Schwab is more likely to advance: (1) expert authenticated prudent process based on objective, non-negotiable fiduciary criteria like statute, case law and regulatory opinion letters notably missing in any Robo-Advice offering, (2) Schwab is capable of supporting all a client’s holdings not just ETFs or mutual funds which is essential to adding value, rendering individualized advice, and professional standing, (3) Schwab can advance multi generational leaps in technological innovation that streamlines cost and greatly enhances the degree of portfolio detail it is possible for advisors to manage, (4) Schwab can introduce a far more modern approach to portfolio construction than our largest broker/dealers that can not wean themselves from high cost packaged products (that make it impossible for the advisor to manage through product packaging to address and manage values essential for the consumer’s success), (4) Schwab can address work flow management and resourcing that are crucial to make advice scalable, easy to execute and manage not possible in an brokerage advice product or in a robo advice product, (5) unlike Robo-Advice, Schwab may give the advisor control over their value proposition, cost structure, margins and professional standing not otherwise possible.

The fact that a Robo Advice firm has $450 million, doesn’t mean it can execute. In fact the greater the number of developers the less likely the intended innovation desired will be achieved—the Apple/Google two pizza rule, to eliminate complexity in development, as development teams must be small.

If the focus is on (1) continuous comprehensive counsel as required by statute and (2) to give the advisor control over their value proposition, cost structure, margins and professional standing, (3) in the best interest of the investing public, Schwab will prevail. Robo Advice is presently the lowest common denominator of advice, cloning the brokerage business model which does not acknowledge or support their brokers rendering advice to avoid fiduciary responsibility. What Walt Bettinger is saying is that there is a fantastic opportunity to be the first firm to actually acknowledge and support expert authenticated advice—which is totally different from anything we have seen before. A much more substantive offering is going to happen, as since Adam Smith introduced the “invisible hand” in 1776, there has never been an instance where the best interest of the consumer has not prevailed.. Walt Bettinger and Schwab are in the game while Wall Street is sitting on the side lines.

SCW

Greg,

To clarify, the RIABiz article does NOT state that Schwab 'depends’ on revenue sharing for Intelligent Portfolios. The article states:

“Schwab will make its money out of view through revenues sharing arrangements with the fund companies it hosts on its OneSource platform.”

From what has been disclosed by Schwab thus far, the only engine of revenue in Schwab Intelligent Portfolios is OneSource.

No doubt Schwab will have to draw down on other resources to pay for this offering like all the other start-up auto-advisors — 'depending’ on its corporate capital. And it will select some funds that are not on OneSource

But the revenues of Schwab Intelligent Portfolios, such as they are, will be derived (unless I don’t know something) from revenue sharing and revenue sharing alone.

Brooke

Brooke,

That is incorrect. Schwab OneSource does not play a meaningful role in the revenue model for this service. We encourage your readers to review the criteria for fund selection when we launch in 2015.

Greg

Greg,

It seems like we define 'meaningful’ differently.

If 100% of revenues from a program derive from one fee arrangement then I just don’t feel it’s a leap to accord that arrangement meaning.

Brooke

Greg, Right now it appears that the only revenues for this venture are revenue sharing. If those aren’t “meaningful” then there’s essentially no revenue for this program and it’s a loss leader? Is that correct? Lisa

Steve Winks comments are right on! Wall Street has not got a clue what is happening to them. I speak to advisors each day and it is like their wirehouses choose to look the other way. Most participants have not been in the business as long as I have, 40 years. I remember when Schwab came on line in 1975. We laughed at them, sure no one would ever use a discount broker. You see I was a broker at Merrill, Lynch, Pierce, Fenner & Smith. It didn’t get any better than that. Ultimately Wall Street bankrupted itself where banks had to buy them saving them from chapter 11. Schwab continued to stand tall. Take this new offering they have, seriously. The ROBO’s will have to work with Wall Street or registered advisors at some point to make their business model work. Why pay 25 basis points for something I can get for free. It’s all modern portfolio theory anyway. Where the broker can excel above this “freemium” approach is to bring value to the table. The traditional broker is in the “value” business where Schwab is in the price business. If the broker competes on price he loses every time. So it comes down to the fact that if the brokers at wirehouses continue to use Modern Portfolio Theory in customer accounts, they are whistling past a cemetery. Now the question is how to retool the advisor to bring the value required to succeed in this new frontier.

Steve Winks and Tom Dorsey both get it. Schwab just validated the entire category of digital advice around 2 trillion or so times.