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Ally's no-fee robo takes a page from Schwab's playbook

Schwab has borne much criticism because its automated investing platform places a chunk of investor portfolios in cash.

That hasn’t stopped Ally Invest from copying Schwab’s playbook, though with a twist: It is now offering its robo advice service essentially for free, with the caveat that a minimum of 30% of the portfolio must be held as interest-earning cash. If investors don’t keep the minimum cash prerequisite, Ally charges a 30-basis-point fee.

“Investors are sitting on bucketloads of cash and if we can get them invested where they can still feel comfortable with a portion in a savings account, then we’ve brought them closer to their goals,” says Lule Demmissie, president of Ally Invest.

Additionally, Ally Invest also launched 90 days of commission-free, self-directed trading and now offer over 500 commission-free ETFs, according to a release.

The move follows the trend of digital-first firms borrowing from incumbents and putting a spin on traditional industry offerings in a play to add new clients and cross-sell them into different products.

In recent months, nearly all independent digital advice firms have added checking and savings account options to their wealth management offerings. That strategy has combined with some firms offering “freemium” services in the hope of upselling clients onto premium services.

Ally Financial Invest IAG

For instance, Wealthfront made its planning offering for free in December, effectively unbundling its software and allowing prospective clients to create financial plans. Personal Capital has for years offered a free planning tool, with the same goal of developing its client acquisition flow. Both digital advice firms unveiled checking and savings accounts this year.

“Ally, like other digital advice providers, is trying to solve the customer acquisition puzzle and are using free features to attract new investors,” says David Truesdell, a financial analyst at digital wealth consultancy firm Backend Benchmarking.

The firm's managed portfolios have around 8,400 clients and $126 million in client assets, according to a recent Aite Group report. The online bank acquired the trading platform TradeKing for almost $300 million in 2016 and has eyed a larger move into the wealth management space, according to Demmissie.

Ally Invest customers who agree to the terms, the cash sits in a high-interest savings product at 1.9% and is meant to balance out potential risk should market conditions change, according to the firm’s website. Ally will rebalance the portfolio, but will not allow investors to drop below the 30% cash threshold.

“It is an interesting way to bring attention to the offering,” says Joel Bruckenstein, co-founder of the wealth management technology conference T3. “For conservative investors or those staring out who prefer to keep cash anyway, it may be enticing if the cash balances pay highly competitive rates.”

The strategy mirrors a tactic Schwab utilized when it launched Intelligent Portfolios, which offered no advisory fees but required clients to leave a sizable portion of investable assets in cash. In March, the firm switched clients to subscription fees, charging $300 for a financial plan and $30 a month as an ongoing fee. (According to its ADV, client portfolios still keep roughly 6% to 30% of holdings in cash.)

Since introducing a flat-fee model, the Intelligent Portfolios Premium service witnessed a 37% boost in new-to-Schwab household enrollments in just over three months, according to a statement. The average household assets jumped 40% over the same time period.

Interest-earning assets are profitable for incumbents. For example, Schwab earned an average yield rate of 2.42% on cash and cash equivalents in the first quarter of this year, according to the company’s earnings statement.

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According to McKinsey, the subscription e-commerce market has grown by more than 100% per year over the past five years, subscribers are most likely to be 25 to 44 years old and have incomes from $50,000 to $100,000.

While clients may disagree with holding such a high minimum in cash, competitive interest rates could certainly benefit investors, says Bruckenstein. The
caveat is that the rest of the automated offering — including any additional fees on investments — would have to be on par with the rest of the digital advice industry, he says.

“If the robo or the interest rate are not highly competitive, it is a non-starter,” Bruckenstein says.

Some investors simply may not need to keep almost a third of their investable assets in cash, especially younger investors with longer time horizons who can generally take on more aggressive investments.

“Initially, I’m not impressed with the Ally offering,” says Bill Winterberg, founder of wealthtech blog FPPad.com, adding that some investors may be turned off by the minimum. “Forcing such clients to have 30% in cash can lead to long term underperformance and failure to meet long-term investment goals”

Others disagreed.

“Ally Invest may get hammered for the 30% cash business but it’s a really savvy move,” says Will Trout, senior analyst at Celent. “The freemium angle is actually the cousin of the subscription model that is making waves in the industry in that clients know exactly what they will pay … in this case, zero.”

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