© 2020 Arizent. All rights reserved.

RIAs cast wary eye on Schwab's new hybrid digital advice plan

The unveiling of a new digital advice offering from Schwab on Tuesday, more than a year after its first robo adviser launch, has some RIAs asking: Is Schwab trying to compete with us?

The custodian's latest offering, Schwab Intelligent Advisory, is built on the same algorithmic advice engine powering its Schwab Intelligent Portfolios.

But unlike Intelligent Portfolios, it will be a hybrid platform, offering financial planning and interaction with a human adviser, with account minimums of $25,000 and fees capped at $900 a quarter.

“This is a modern approach to financial planning and wealth management that mirrors what today’s consumers have come to expect in other aspects of their lives," Neesha Hathi, executive vice president at Schwab Investor Services, said in a statement.

The target client is "likely mass-affluent, is digital first and value-focused, and who is self-directed but may want some direction in helping them establish goals and create a plan to reach them," according to Schwab spokesman Rob Farmer.

A number of analysts interpreted the release as a response to increasing competition in the digital advice space. For example, Schwab currently lags behind Vanguard in terms of AUM for its digital advice platform.

However, some RIAs expressed concern about the custodian competing for the same client they were courting with the institutional version of Schwab's robo.

FPPad blog founder Bill Winterberg says the new offering challenges advisers in a way that Schwab's initial robo did not because of the inclusion of human advisers. "[This] conflicts with Schwab's RIA business, somewhat, especially for RIAs who target middle class."

Schwab insists the platform will not cannibalize the business of Schwab RIAs. Farmer says that clients deemed to have more complex and specialized needs will still be referred to Schwab RIAs.

"Independent advisers are an important part of Schwab's overall spectrum of wealth management services and the best solution for investors with more complex needs," Farmer says.

"Schwab Intelligent Advisory is not designed to serve a segment so much as it is to serve a need," Farmer adds. "We’re launching Schwab Intelligent Advisory because it meets an important need for investors — planning is critical to successful investing, but not enough people have a financial plan."


Such assurances did little to allay concerns among RIAs, who were surprised by the announcement.

"It sounds like they are offering what we're offering," says one longtime adviser who offers Schwab's Institutional Intelligent Portfolios to smaller account referrals.

The adviser, who asked not to be named for fear of repercussions, says the tool has been useful in providing an outlet for more clients than what the practice could previously accommodate. "It’s a referral management tool," the adviser says. "We've got a home for everyone now."

Another independent adviser also using Schwab's institutional robo tool voiced similar concerns about competition, but felt confident RIAs still had an advantage over the new platform. The adviser also asked not to be named.

"While it's designed to compete with what we're doing, they'll never have that personal connection."

"It is encroaching on what they have given us," he says. "But it can never compete. It offers the quality of advice you can get from a 1-800 number. So while it's designed to compete with what we're doing, they'll never have that personal connection."

Farmer says that Schwab employees would be taking calls and answering queries from clients on the new platform, but did not have numbers in terms of staffing.

Both advisers expressed doubts about the advice that would be provided by the new platform.

"Schwab has always claimed the guys in the lobby are advisers," one adviser says. "They may be nice people with their Series 7 and their Series this and that. But they are not necessarily advisers. They are reading off a script."


Schwab's current robo has garnered over $10 billion in retail and institutional assets since its 2015 launch. But that's been a distant second to Vanguard's hybrid digital advice platform, which reported $46 billion in AUM for the third quarter.

"In many ways this seems like a response to Vanguard, which has had a great deal of success with its hybrid robo service," says Corporate Insight senior analyst Sean McDermott. . "We suspect that a large motivating factor behind this move was a recognition that Schwab’s customer base is not the same as say Betterment or Wealthfront’s. Schwab’s target customer is older, more affluent and expects a higher-touch service. This is a strategic play to create a service better aligned with Schwab’s target client base. "

Lex Sokolin, director of fintech strategy at Autonomous Research, wondered if the new offering is intended to boost Schwab's digital advice fortunes. "You could also read it as Intelligent Portfolios not attracting enough assets and needing a human push," he says.

At the same time, the emergence of a second offering from a major wealth management brand renewed speculation about the survivability of digital-first firms.

"The big firms aren’t looking to make money from robos," Celent senior analyst Will Trout says. "It's more about sucking up all the oxygen. Incumbents build on brand power by going hybrid and offering advice."

Digital-first competitors, however, flatly rejected any prediction of their imminent demise.

"Both Schwab and Vanguard are merely selling users their own products, not using a full set of the customer's data and not assigning a personal adviser to guide customers through a long-term financial plan over time," says Mark Goines, vice chairman at Personal Capital. "So of course, we are better.”


One important takeaway is that the hybrid robo advice model is now the dominant play for wealth management firms, says Celent's Trout. "It's one more point to the ascendance of the hybrid model over the pure play standalone," he says.

Schwab Intelligent Advisory will launch in the first quarter, according to the firm.

Sokolin says that while the new platform will raise the question of pricing compression for advisers, it's not a dire situation for Schwab RIAs yet.

"As long as Schwab-custodied RIAs continue to drive assets into Schwab-managed funds or generate brokerage fees, the firm should support the custody business. But technology is forcing a convergence of disparate players (wirehouses, brokers, advisors, independents) into the same arena — the open web. And scale helps when you're in that environment."

For reprint and licensing requests for this article, click here.