Adam Nash makes direct 'CEO-to-CEO' plea to Schwab to rethink its robo

Brooke’s Note: In an interview yesterday, compliance consultant Peter Mafteiu asked me to imagine an employee of the Securities and Exchange Commission reading over Schwab’s ADV application for its robo-RIA, Schwab Intelligent Portfolios, last year. Imagine, he continued, whether that reviewer walked the Schwab file down the row of cubicles to the supervisor and asked for help. It does not, Mafteiu says, appear that interaction took place. Nature abhors a vacuum. So Adam Nash, more taken aback by Schwab’s ADV than the SEC, has started a debate on his blog, causing Schwab to expertly reply on its own blog. Vacuum filled, at least partially. Hopefully this discussion will continue, crowd-source style, in sympathy with that hypothetical civil servant who might have been a wee bit overwhelmed. Little did they know they were seeing the legal innards of a newfangled business model invented by Schwab, even as its old model of revenue flow drapes over it in a way it would take a very smart robot indeed to understand.

“We don’t believe we’ll kill Charles Schwab. It is a great company, albeit focused on a different customer — the baby boomer. We do believe, however, that we’ll force Charles Schwab to become even better.” – Adam Nash, chief executive of Wealthfront, October 2014.

That was then.

In a blistering blog post published yesterday, automated advisor Wealthfront Inc. chief executive Adam Nash slammed his massive rival 35 miles up Rt. 280 in San Francisco as a company with “gotcha pricing,” a greedy approach and an “almost criminal” ADV-expressed willingness to allocate as much as 30% of a client portfolio’s assets into Schwab Bank. See: Schwab tells the SEC its robo-advisor has a 30 basis-point fee and big-time cash allocations held by Schwab Bank.

“I now find myself hoping we never lose our identity the way Charles Schwab has,” Nash writes on the heels of the launch of Schwab Intelligent Portfolios. See: Schwab sings 'Blue’ as it rolls out its robo — and phono — functions ahead of deadline, with minimums.

Pregnable kingdom

In a rapid-response counterpunch on its blog that same day, Charles Schwab & Co. excoriated Nash for misrepresenting facts and suggested that sour grapes might have been one of his motivations.

“Adam wishes he could build a moat around Wealthfront and protect it against competition,” Schwab’s post reads.

But Schwab, in the ferocity of its response, may have lowered its own drawbridge and allowed entrance to the castle, according to William Trout, senior analyst of wealth management at Celent, an industry research and consulting firm.

“It is worth noting the vociferousness of Schwab’s response,” he says. “That is, the bear has lashed out, and Nash need say no more. He’s placed his firm (at least from the investing public’s point of view) on the same level as the much larger Schwab. In that sense he’s just won a large battle.”

In an interview yesterday, Nash says that his blog offensive is being waged on a personal level, which is why it appears on his own blog and not on Palo Alto, Calif.-based Wealthfront’s.

Adam Nash: I grew up out
here. And here, Schwab is legendary.
That’s why it’s so troubling.

“In some ways, it’s a note CEO-to-CEO. I hope Schwab will take the criticism and they’ll make changes. It’s not too late. There is time to fix this.”

Walter Bettinger is chief executive at Schwab but chairman Chuck Schwab, as the face of the company, remains the de facto CEO. See: What Chuck Schwab’s talk showed about his complex relationship with RIAs.

'Kick the tires’

Schwab’s no-byline blog response to Nash maintains that nothing needs fixing and that a consumer need only apply a method of due diligence familiar to any used-car buyer.

“We’re excited about the launch of Schwab Intelligent Portfolios and know that consumers will kick the tires and see the great value that it offers,” the blog reads.

But the buyer need beware, says Peter Maftieu, principal of Sound Compliance Services of Gig Harbor, Wash. His reading of the Schwab Intelligent Portfolios ADV is that it is too light on specifics for useful analysis of the merits of the offering.

“How do you kick the tires if you don’t know what you’re reading?” he asks.

Maftieu adds that Schwab’s advertisements touting No advisory fees. No account service fees. No commissions. Period seem misleading in light of Schwab’s disclosure that it may earn revenues from ETF trades at third party brokers. See: A charged-up Walt Bettinger slams all non-Schwab robos at IMPACT 2014 with an energy appreciated by RIAs.

The exact language in the Schwab robo disclosure reads: “Revenue may also be received from the market centers where ETF trade orders are routed for execution.”

Black mark-up?

“It’s not a true statement [of no commissions],” Maftieu says. “Isn’t a mark-up of an ETF the same thing as a commission?”

Schwab executive vice president Naureen Hassan, who leads Schwab Intelligent Portfolios, says in a statement that her company gets the big stuff right. “We know there are three controllable variables that have an impact on the long-term success of investors — being and staying invested; having access to quality investment advice and money management; and keeping costs low.”

Schwab’s original values as charted in
John Kador’s 2005 book 'Charles Schwab:
How One Company Beat Wall Street
and Reinvented the Brokerage Industry’ and
displayed in the Nash blog.

Nash isn’t convinced about Schwab being “low-cost” and points to Schwab’s use of smart-beta index funds with fees that are, he says, two-to-three-times higher than conventional index funds. Nash also singles out what he considers to be a wag-the-dog use of Schwab Bank to generate revenues from investors’ cash. See: Schwab spills robo-beans to Wall Street, including a Schwab Bank wrinkle, cannibalization rates and the algorithm’s distaste for OneSource funds.

“It’s a company with a fascination with net interest margins,” he says in the interview.

Schwab Intelligent Portfolios pantry includes 14 Schwab ETFs, 12 Vanguard funds and eight BlackRock’s iShares ETFs, among 11 issuers. Eight of the 54 intelligent portfolio ETFs are funneled through Schwab ETF OneSource, Schwab’s no-transaction-fee ETF platform. 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.

But Schwab ardently defends its cash allocation practices in the blog piece that responds to Nash. “There’s no right or wrong answer to how much cash an investor should hold as an investment, it is a strategic decision.”

Nash isn’t buying it. In his blog entry, he says that Schwab strategically allocating upwards of 30% of a client portfolio to cash, as it discloses in its ADV, is “almost criminal.”

Tossing the handcuff-evoking grenade right back, Schwab writes that “using the 30% cash example is, to borrow Mr. Nash’s trope, 'criminal’ itself, as he knows that a 25 year-old wouldn’t be invested that way within Schwab Intelligent Portfolios unless they need that money in a matter of just a few years — in which case cash exposure of that sort is an appropriate choice.”

Father figure

Nash says he wrote the blog entry in the context of growing up idolizing Chuck Schwab as a white knight taking on Wall Street’s black hats. See: Charles Schwab will speak and his fellow CEOs will listen.

“It’s true,” Nash says. “I grew up out here. And here, Schwab is legendary. That’s why it’s so troubling. [Schwab’s robo effort] was a real opportunity.” That’s especially true, he says, because as a new feature it could have been created from whole cloth rather than by patching together old profit centers.

Chuck Schwab’s approval has always loomed large for Nash and Wealthfront co-founder Andy Rachleff. Both have described Schwab as a mentor of sorts and his firm as an inspiration for Wealthfront, which was founded in 2007. See: Andy Rachleff is out as CEO of Wealthfront as former LinkedIn star takes his place.

Will Trout: The bear has lashed
out, and Nash need say no
more.

In September, Wealthfront scored a major coup when it announced that it would supply the employees of Google, the Mountain View, Calif.-based search engine giant, with free financial management for non-401(k) assets for employees with balances of less than $100,000. At the time, Nash declined to delve into the specifics of the deal. See: Wealthfront raises a cool $20 million from VCs to pursue a big slice of a $1 trillion market.

According to its latest ADV, Wealthfront has more than $2 billion in assets under management.

Shibboleths be damned

A reporter asked Nash why he is willing to get so public and personal when such direct criticism isn’t considered cricket in the financial services industry.

“You want to make it clear what you stand for,” Nash replied. “I also think this is the benefit of being an outsider. There are too many [incestuous] relationships” among the legacy players.

Trout says that indeed, the blog broadside is very Silicon Valley of Nash.

“It’s generational. Like many of his contemporaries, Nash values efficiency over tradition and is quick to question even the most longstanding industry shibboleths.” See: Wealthfront’s high-net-worth cat leaps out of the bag — keeping it one robo 'pivot’ ahead of Schwab.