Schwab’s trio of digital advice offerings — Intelligent Portfolios, Institutional Intelligent Portfolios and Intelligent Advisory — now command a total of $25 billion in assets under management.

Steering its growth strategy is Tobin McDaniel, president of Schwab Wealth Investment Advisory, who sees neither startups nor digital platforms from asset managers or custodians as competition.

Instead, McDaniel says, Schwab's digital advice is foremost vying for the attention of the self-directed investor, while the firm attempts to convince wary RIAs to layer the advice platform into their practices.

In the first of two parts of an extended interview, McDaniel discusses Schwab’s efforts to boost advisor use of its white label offering, the firm’s learning curve in rolling out digital advice, and the key elements any institution will need to compete in the future wealth management market.

An edited transcript of the conversation follows.

Where are Schwab’s automated and hybrid services right now?
Across the offers we’ve got $25 billion in assets serving over 200,000 accounts, and we’re seeing accelerated growth this year versus prior years. Our hybrid offer is growing faster now than it was at the beginning, which goes to show this is a new space and we’re becoming aware of this type of investing. The industry will grow and hopefully we remain a leader and grow with it.

Is the retail automated offer growing at a parallel rate to the hybrid, or is the hybrid growing faster?
We don’t split the growth out. Retail has been driving our growth overall relative to the independent advisor white label version. Although we continually see new adopters and more growth as people figure it out, particularly the white label offer. Advisors have to figure out how to fit it into their practice: who’s my target, how do I use it? Frankly there are some capabilities we still need to lead to wider adoption.

Advisors need a lot of attention and maybe an extreme amount of reassurance to feel comfortable with a product that they initially thought was trying to take their jobs.
That makes me think about the adoption curve we’ve seen with many of the advisors who do use it. They start by opening their own accounts and employee accounts, and then they watch it for an extended period of time. Some never leave that phase, while others say, ‘Okay, I like this, I can start to figure out how to use it with clients.’ They then start to use it with clients and they find a segment that works. I completely understand; they’re serving their clients, they’ve got deep relationships, and they have questions. Does this technology fit? Does it work, how does it work, and how do they use it?

In trying to respond to advisor demands for a digital advice offering, is there a sense of flexing muscles that you didn’t know you had?
I think what we are learning is that any time you put a new product on the market, you learn a lot, really fast, from how it’s adopted. This is the whole premise of agile in technology, right? You get products out quickly; you learn how consumers react, whether its advisors or retail clients, and then you make changes. In the hybrid offer, we’ve made several changes since launch just because we started to see how people interact with it, and ways that they would prefer to interact with it. So I don’t know if it’s making us flex different muscles, it’s just making us recognize the market will tell us what we need to have to help clients or advisors.

There have been many small changes, that’s mostly what it has been. The most meaningful changes have been helping investors understand the product. We’ve added more videos, new video content through the experience, better content around it, so they understand what they’re getting invested in. We’ve also made some changes to streamline the enrollment process. If someone wants to go through a faster version of the financial plan, they think their situation doesn’t need as many steps, they can take that path. If this doesn’t feel like enough they can loop into a longer path.

Tobin McDaniel, president of Schwab Wealth Investment Advisory.
What we are learning is that any time you put a new product on the market, you learn a lot, really fast, from how it’s adopted," says Tobin McDaniel, president of Schwab Wealth Investment Advisory.

But much of the education, we saw the same need when we launched Intelligent Portfolios. We just helped investors understand what the product was and how might they use it, because so many never came to an advice product before. These people are self-directed, either because of the amount of assets they had, their fee sensitivity or just because that’s how they wanted to engage. Now they’re seeing either in the robo or the hybrid a model that works for them, but they need to really understand and wrap their heads around it.

Is it a different type of understanding needed, than the RIAs that you’re working to get into the white label product?
We often say there are 7,700 RIAs who work with Schwab, and 7,700 different business models. It’s more about helping them think about ways they could use it, sharing case studies of other advisors who have used it, and listening to what they need and building those additional capabilities.

Schwab has been offering this education to advisors for a while now though. Are there things that keep getting repeated but aren’t sinking in, or are they still resisting?
There’s a need for some changes. The technology, that I’d mentioned. And then there are just advisors who say this is interesting for the long run, but not an immediate opportunity for me. We still think there’s a lot of opportunity in the RIA space. When we move from robo advice being a specific thing to just one of the technologies you use to run your business — the same way stockbrokers went from placing a trade by phone call to going online — as the technology becomes more core to how RIAs operate and they can see that and become more flexible to allow them to operate the way they do, we’ll see more adoption.

Vanguard’s Personal Advisor Services is near $100 billion in AUM. If the adoption among Schwab RIAs was where the firm wanted it to be, what would Schwab’s digital advice AUM be?
I’d say we’re very happy with the AUM we have; $25 billion is a great number, particularly at the rate we’ve been growing. A year ago we finished around $12 billion, so we’re quite pleased about the growth on retail and advisor services.

Do you not consider Vanguard from a competitive perspective?
Someone from Visa once told me that Visa’s main competitor is not Mastercard, it’s not American Express, it’s cash. Certainly, we’d look at what all the other firms with digital offerings are doing and doing it with whatever model, but our focus is on people who are investing on their own. At Schwab alone there’s a trillion dollars of self-directed in our retail business and I think many of those investors, as they learn about these solutions, will come to them, have better outcomes, and feel more confident in their financial lives. So for me, the competition is all those people who haven’t quite yet discovered there’s a better way to invest. I truly feel that. When we launched, people would ask me, ‘Are the startups your competitors?’ No, not at all. There are all these assets out there that aren’t in one of these offers and I think there is plenty for us to all grow.

(Bloomberg News)
(Bloomberg News)

So the focus is on converting Schwab’s self-directed investor pool?
We have a couple of focus areas. We are certainly introducing it to the Schwab clients who could come and enroll in these offers, but we also focus on driving new asset flows and accounts to the firm. We don’t do a lot of advertising but we do have some very specific digital advertisements that have been quite effective for us and we’re seeing our new-to-firm numbers get stronger, more than double what they were last year.

We’ve got clients of all ages investing in this product. Whether it’s existing Schwab clients or those new to the firm, we’re attracting people who are nearing or in retirement as well as people just getting started. This is one of the misconceptions, as you think back to three years ago, when everybody said digital is just for millennials. It turns out there are lots of people who want technology to help them.

Since we’re talking about generations here, I’ve noticed a trend in microinvesting. They are very aggressively pursuing that beginner client.
I think it’s really interesting what some of these firms are doing. What’s best about it is they are introducing people to investing at a young age, where you don’t have as much money and you might learn about investing and learn from mistakes. I started investing in the dot-com era, and when I was in college, I had a great return until I had nothing left. I was just buying whatever stock looked like it went up a lot the day before. I didn’t have a lot of money so it didn’t matter. But it’s a good lesson to learn early and I think that’s fantastic.

I do think that investors, even millennial investors, will want some personal help over time. Our research tells us millennials are more likely to say that some day my situation will be complicated and I want a person. Now, they’re going to want a person who is enabled with fantastic technology, who is empowered to help solve their problems and who is highly skilled. I do think we’ll see an evolution as that generation matures and has more significant financial questions.

What's the challenge then in creating a really low-cost model that can compete with a future where everything is low-cost, where there are no barriers to entry?
It comes down to scale. Scale is incredibly important in our industry because it allows you the ability to operate. If it means you’re operating efficiently, you can offer incredible value to investors — low prices, low costs. That is going to be even more critical in the future because it’s not just being able to operate that way, but the investor’s expectation is going to be, 'I can digitally invest with you, or I can do most of it digitally and have the experience I expect.'

Now technology has compressed prices in our industry over time like many other industries, right? In 1975, when Charles Schwab started this company, it cost him a couple of hundred dollars to trade stocks. Regulation changed but technology also changed and now it’s $4.95 a trade at Schwab. It’s been an incredible compression. ETFs can get an incredibly diversified portfolio for a few basis points now. So we’ll see compression but I think investors will still have places where they want to work with someone. Efficiency, scale and great technology are going to be what’s required to operate in that future environment.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access

Suleman Din

Suleman Din

Suleman Din is technology editor of American Banker and Financial Planning. Follow him on Twitter at @sulemandn.