Charles Schwab's announcement this week of a no-fee online advisory platform could be a game changer.
The new Schwab Intelligent Portfolios service, aimed at both retail investors and RIA clients, puts pressure on both existing online players -- although the firms deny it -- and independent broker-dealers as much as on Schwab's rivals in the RIA custodial space, say analysts.
"This is a head-on counterattack and is definitely making the [digital] space a lot more competitive," says William Trout, a senior analyst for Celent's wealth management division.
Indeed, "the pressure is on for IBDs to get into the digital game," agrees Grant Easterbrook, an analyst for Corporate Insight's Consulting Services in New York.
The digital firms, not surprisingly, say they welcome the competition. FutureAdvisor CEO Bo Lu calls the introduction of the Schwab Intelligent Portfolios "great news," because it validates the digital market. "It's good to know a major player thinks robo advisors represent the future," he says.
Similarly, Betterment chief Jon Stein -- whose company recently announced a deal with rival custodian Fidelity -- says the Schwab move demonstrates "huge consumer demand" for automated investment services and will draw more attention to the market.
(Wealthfront, the industry's leading digital advisor with around $1.4 billion in assets under management, just announced a new financing round of $64 million led by Spark Capital, bringing the Palo Alto-based firm's cash reserves to $100 million.)
But the online firms also point to their proven track record, value proposition and stables of top-flight software engineers. "We've been doing this for years, and we've solved some hard problems in the process," Lu says. "In Silicon Valley, having an actual product trumps announcements any day of the week."
PRESSURE ON IBDs
One group facing extra pressure to make a digital move is independent broker-dealers.
The IBDs "have been busy investing in online client-facing technology, but this is an area where there is still a big gap for them," says Sophie Schmitt, an analyst for Boston-based Aite Group.
LPL, the nation's largest IBD, did make a short-lived attempt to build an online business NestWise, aimed at mass affluent clients -- but the initiative proved to be short-lived and was shuttered last year. The firm declined to be interviewed about its existing digital strategy.
Commonwealth, which has ranked No. 4 in the last few FP50 rankings, exemplifies the current ambivalence of many independents. Many advisors already have rebalancing and client portal tools, says Darren Tedesco, the firm's managing principal for innovation and strategy -- so the question Commonwealth and other IBDs must answer is, "Does it make sense for the advisor's business model to turn [the back-office functions] into a client-facing technology?"
Advisor demand will determine the answer, Tedesco says: "We're still taking a wait-and-see approach to see how this all shakes out."
The most logical use of digital technology for advisors, Tedesco believes, is to capture a market segment of younger, less affluent clients who already know about an RIA through existing clients like their parents. But he is more skeptical about a small or midsize advisor's ability to compete head-on with established online services by using a white-label digital service to attract new clients.
"If someone is looking for an investment manager and they see Wealthfront has over $1 billion in assets, they may be hesitant to invest with 'Joe Advisor' who has $50 million in assets," Tedesco says. "Competing with a major brand name may be more difficult than sliding into a relationship with someone who has a connection with an existing client."
FOR CUSTODIANS, VARIED APPROACH
Schwab's rival custodians, meanwhile, have taken partner-based approaches to offering advisors a digital arsenal -- and are sticking to their guns.
Earlier this month, Fidelity announced a "strategic alliance" with Betterment, offering RIAs a white-label version of the company's digital advisory service for 25 basis points -- a deal that will not be altered "in any manner," says Stein, by the Schwab announcement.
TD Ameritrade Institutional, meanwhile, is focusing on an "open architecture strategy" says division President Tom Nally.
TDAI clients are already getting a lot of the "heavy lifting," Nally says, from the custodian's iRebal software, which he says can perform such tasks currently being offered by robo advisors -- including automatic rebalancing, tax loss harvesting and model portfolio management.
Meanwhile, the company is working with a variety of firms such as Upside, Trizic and Jemstep that will offer integrated experiences on TDAI's Veo platform.
Advisors need to "position themselves" digitally to suit their own particular needs and markets segment, Nally says. "One size never fits all," he explains. "We don't want to pick a horse; we want to be a stable."
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