Will Schwab Upend the Advisory Business?

Charles Schwab recently announced plans to expand its suite of wealth management and advisory services with the launch of Schwab Intelligent Advisory, a hybrid advisory service that combines live credentialed professionals and algorithm driven technology to make financial and investment planning more accessible to consumers. Schwab Intelligent Advisory will provide investors with a financial plan tailored to their situation and goals, ongoing guidance and expertise from Planning Consultants who are all CERTIFIED FINANCIAL PLANNER™ professionals, and a fully automated and diversified portfolio − all at a very low cost. The service is expected to launch in the first half of 2017.

The offering, with a relatively low $25,000 initial minimum investment, targets emerging and mass affluent investors who do not have highly complex financial situations who have multiple financial goals and who understand the value that a personalized financial plan provides. Once enrolled in the program, clients will be able to add additional accounts for as little as $5,000. Clients can sign up for automated tax loss harvesting for each account staring at $50,000.

The offering includes the following:

  • A comprehensive financial and investment plan. Clients will complete a self-guided online planning tool focused on their specific financial situation and goals including both Schwab and non-Schwab accounts, followed by a one-on-one conversation with a credentialed Planning Consultant to review the plan, prioritize goals and discuss investment choices.
  • Ongoing guidance from Planning Consultants. Schwab Intelligent Advisory clients will have access via phone or videoconference to a team of Planning Consultants – all of whom are CERTIFIED FINANCIAL PLANNER™ professionals. In addition to working with clients on their initial financial plan and investment choices, Planning Consultants can provide guidance on a range of wealth management topics including overall goals and saving targets, retirement planning, college savings, long-term care planning and budgeting. Regular check-ins can be scheduled online and will typically occur annually, but clients can engage with Planning Consultants as needed, and they also have access to live service support via phone, chat and email − 24 hours a day, seven days a week.
  • Fully automated, diversified portfolios. Based on their financial plan, clients will be invested in a fully-automated, diversified portfolio using Schwab Intelligent Portfolios. The portfolios are comprised of low-cost exchange-traded funds (ETFs) from Schwab and third-party providers including Vanguard, iShares and PowerShares which are selected based on quantitative criteria such as size, bid-ask spread, tracking consistency, and operating expense ratio. Investors will have access to up twenty globally diversified asset classes in each portfolio including equities, fixed income, real estate, commodities and an FDIC-insured cash allocation to manage volatility and risk. The portfolios also use a combination of fundamentally weighted and market cap-weighted ETFs, giving investors an additional layer of diversification.
  • A customized dashboard. Once the plan is in place and investments funded, clients will access a customized digital dashboard to view their plan, their progress toward goals, and portfolio performance – from both a desktop and mobile device.
  • Low cost. Advisory fees under Schwab Intelligent Advisory are 0.28% of a client’s managed assets with a $900 quarterly fee maximum, making it one of the lowest cost advisory solutions available to investors today. The service will charge no trading commissions or account service fees, and the ETFs included are based on the lowest fees in the ETF industry once they meet size, spread and tracking consistency criteria. The weighted average operating expense ratio for the portfolios currently range from 0.08% for a conservative portfolio, 0.19% for a moderate portfolio, and 0.24% for an aggressive portfolio.

In addition, Schwab Intelligent Advisory will offer a completely paperless account opening and account management experience, and clients will be able to establish automated account funding on a reoccurring basis, as well as fund accounts using mobile check deposit.

A REAL SHOT

At first glance, this offering appears to be similar to that of Vanguard Personal Advisory Services. It also appears to be similar to that of Personal Capital, which charges 85 basis points. There are, however, some differences. First, the Schwab minimum is one-half the current Vanguard minimum for a similar service.  In addition, it is probably not a coincidence that Schwab is charging 28 basis points, which happens to be two basis points less than Vanguard charges. Schwab caps the fee at $900 per quarter; Vanguard does not. More importantly, to date Vanguard has not aggressively marketed their product to the general public; they market it to existing shareholders, and it is there on the Vanguard website, but the marketing has been low key. In spite of that fact, Vanguard has attracted approximately $55 billion to their program. Personal Capital, as stated earlier, charges 85 basis points and to date has about $2.8 billion in AUM according the their most recent ADV Part 1. Their marketing is also somewhat limited.

Schwab, on the other hand, is a marketing machine. They are a national brand, advertise nationally through mass media, and they have a nationwide branch network. It seems that Schwab has a real shot at doing something that others have found challenging: Building a low-cost, entry level financial planning service for the mass affluent on a scale never seen before.

Aside from Vanguard and Personal Capital, there have been other attempts to provide low-cost planning services:

The Garret Planning Network was an early attempt to provide lower cost planning to a mass affluent audience. Created by financial planning visionary Sheryl Garrett in 2000, the network has achieved some degree of success providing financial planning on an hourly basis, however the network’s reach has been constrained my issues of scale. If an advisor charges a flat fee per hour, and chooses not to manage assets, there is a limit to how many hours can be billed unless the process is highly automated, and historically it has not been.

More recently Michael Kitces, one of the most prolific writers and speakers in the financial planning industry, and Alan Moore, a younger financial planner with some vision and experience, created the XY Planning Network. Their network of 334 advisors, with a median age of 37, is the leading organization of fee-only financial advisors who specialize in working with Gen X and Gen Y clients.

Members of both the Garrett Network and the XY Planning Network have done tremendous work in addressing the needs of the mass affluent, but neither has the resources of Schwab.  On the one hand, Schwab will be competing with these networks for the same clients; on the other hand, if Schwab’s marketing raises awareness about the value of financial planning, these networks may benefit from Schwab’s marketing efforts because they will only need to capture a small percentage of the investors who choose them over Schwab to make a significant impact on their growth rates.

The other businesses that could be at risk are some of the broker/dealers who have concentrated primarily on investments and done little if any financial planning. With investment management fees becoming commoditized, and margins shrinking, this segment of the market is already consolidating. There is another segment of the market that already offers investment management and financial planning for the mass affluent, however, these advisors generally change significantly more than 28 bp with a $900 quarterly fee maximum.

THE MORAL HIGH GROUND

We will, no doubt, hear from some advisors who currently custody assets at Schwab who see Schwab Intelligent Advisory as either an immediate threat today, or one that can morph into a threat in the future should Schwab expands the scope of the service and move upstream. If history is any guide, the majority of Schwab advisors will not be too worried about Schwab Intelligent Advisory today, but the minority who were planning to address the mass affluent market with their own offering might be. Furthermore, if Schwab is perceived to be competing directly with their advisors in the future, the situation could change rapidly.

Based on what the offering is today, it is probably an exaggeration to say that the Schwab Intelligent Advisory threatens to commoditize financial planning, but we may be seeing the beginning of the commoditization of entry level planning. If that is in fact the case, it carries implications for the industry at large and it could put Schwab at odds with some advisors.

Some advisors may view Schwab Intelligent Advisory as a threat to their business model or to their growth, but as Schwab is trying to bring planning to a market that independent RIAs have largely shunned until recently, Schwab will hold the moral high ground. They are attempting to bring financial planning to a largely underserved market that desperately needs it. If advisors want this business, they will have to compete fiercely to get it.

To compete effectively in the future, independent financial advisors will need to automate whatever can be automated, further scale their practices, and provide value beyond the basics. Most readers of this column currently do just that, but you will be constantly challenged to raise the bar further. Second, you will need to do a better job of enunciating the value that you provide to clients, particularly if you expect to be paid a premium price. Now that both Vanguard and Schwab have set a benchmark for what investment management and basic financial planning cost, higher fees will need to be justified by premium valued added services. For many of you, this will entail changes to your business model, your technology, and to your reporting methodology. Finally, you may need to expand your service offering to further enhance your firm’s value proposition.

Bottom line: Schwab Intelligent Advisory has the potential to be a major industry disrupter, but it does not have to disrupt the business of T3 Technology Hub readers who can evolve with the times.  It is too early to tell to what extent, if any, Schwab Intelligent Advisory impacts your business, but advisors would be well advised to pay close attention to how this story develops.

Joel Bruckenstein
Joel Bruckenstein
Joel P. Bruckenstein, CFP®, is Publisher of the T3 Tech Hub (formerly the T3 newsletter) and the producer of the Technology Tools for Today (T3) Advisor Conference, the only annual technology conference for independent advisors, as well as the Technology Tools for Today (T3) Enterprise Conference. Bruckenstein is an internationally acclaimed expert on applied technology as it relates to the financial service industry. He is the co-author of three books: Virtual Office Tools for a High Margin Practice, Tools and Techniques of Practice Management, and Technology Tools for Today’s High Margin Practice. Joel’s monthly technology columns appear in Financial Advisor magazine and Financial Planning magazine. In addition, he compiles the annual technology survey for Financial Planning magazine. Bruckenstein has for more than twenty years advised financial service firms of all sizes on improving their technologies, processes and workflows. For more information about Joel Bruckenstein and the services his firm offers, please visit www.JoelBruckenstein.com

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