Schwab’s Intelligent Portfolios has been critiqued for sizable allocations to cash in client portfolios. But the decision has strategic value and performed well, so the firm has no intention of changing that aspect of its digital offering, says Tobin McDaniel, president of Schwab Wealth Investment Advisory.

In the second of two parts of an extended interview, McDaniel discusses the rise of hybrid digital advice, the role artificial intelligence will play in wealth management automation, the firm’s work with Amazon’s Alexa and future development goals.

An edited transcript of the conversation follows.

Let’s talk about how Schwab Intelligent Portfolios has been critiqued about its cash allocation in portfolios.
We’ve always considered cash an asset class at Schwab, the balance in a portfolio that helps in market ups and downs. It’s the one asset class that you know what the return could be. In fact, in 2015 cash was Schwab Intelligent Portfolio’s best performing asset class because the market was down that year from the time we launched. If I look at our client base, we have incredibly high client promoter scores and net promoter scores among our clients, and their cash levels actually are up 10% on average, which is a little more than what the average RIA’s client holds, and actually far less than what the average self-directed client holds. It fits with how people actually do think about their investing and it gives that diversification that no other asset class can.

We have no intention of changing it, because we talk to our clients about it, we pay attention. The portfolio’s performed very well for us and even in an up market, we’ve had strong performance and we think it provides the ballast for if and when the market turns. It is different, but we stand by it though. We feel it actually plays an important role in the portfolios for most investors. Most investors need a portfolio for all weather that will help them stay in the market. For a lot of investors it’s not just getting them in the market, it’s keeping them in the market in the downturn. That means diversification and softening the blow when markets go down and then having some cash to deploy when it starts to turn and you want to buy more shares of other asset classes.

If Schwab’s digital offering were an independent, how would you kind of assess it versus the digital-first independents that are out there?
We assess it by the number of clients we’re serving, how much we’re growing and the client satisfaction metrics. That’s how we look at a lot of what we offer at Schwab, we look at client satisfaction and growth. And for 45 years those have proven to work through the economic model for us and so those are the main ways we take a look at how we’re doing.

Tobin McDaniel, president of Schwab Wealth Investment Advisory, defends the cash allocations in Schwab Intelligent Portfolios. "For a lot of investors it’s not just getting them in the market, it’s keeping them in the market in the downturn," he said.

Is there the opportunity for an acquisition, possibly one of the microinvesting apps, to bring in an investor class that maybe Schwab hasn’t tapped yet?
There’s so many different technologies out there, you always want to take a look at them. When it came to the robo advisor, we looked at what was out there. But we said we can do this ourselves, we can probably do it at a better price point, or better cost to ourselves to build it, and we think we can build it in a way that it actually becomes a capability we can use across the company. So now we’ve got this platform we can use in different ways. You never know what the next thing is, how we’ll think about that.

Is Schwab developing an Alexa skill for the hybrid or for the retail automated service?
Our technology team is looking at Alexa skills but we’re not developing anything for these products right now. We’re playing with the Alexa skills, we’re in the same boat as everybody.

Robo advisors aren’t replacing human advisors. But does the digital-first model break the chain of client ownership? Does it allow the institution to take ownership of that client away from an advisor?
I think that varies by firm. If you think about independent advisors and how they build their relationships with their clients, they build them over time, they provide that personal touch and really hold that relationship. And then you’ve got very different clients and very different businesses. If you think about all the people who are self-directed investors out there, their relationships are with firms because they just primarily use a website and maybe a phone number. And so offering those investors hybrid advice is not sort of a new relationship for them, it’s just a new capability you offer them.

I’m trying to echo some concerns about a shift to a call center model. When a client calls in, they don’t have a specific advisor, the relationship is with the brand.
Broadly, the model is still serving very different clients. A hybrid offer is where clients with as little as $25,000 can get invested. It’s for people who want episodic advice but not that deep ongoing relationship. It’s a very different model and what you receive is very different. We think the hybrid offer is fantastic because these are people who never had a financial plan, never worked with a CFP, and come out with far more confidence in their financial lives than they ever had. There’s a sort of feeling you get when you look at the client surveys afterwards. But it’s an audience that wasn’t served by traditional advisors just because of their size.

Do you see the hybrid model evolving to introduce AI into front-facing interaction with the client?
I’m not sure if that’s on the near term horizon. In the near term, the model we’ve got and that others are using works well. You’re using the technology for the parts where you can sell service and then talking to the expert who can help you navigate the more personal aspects, what your goals and your ambitions are. Automation in our industry seems to be more around transactional sub-service items, right? Like, let me reset my password. I can do that with a chatbot versus when I really need to talk to somebody and talk about personal things. That doesn’t seem to be going away anytime soon.

I ask because service demands on the hybrid models has already outstripped capacity at times, and every firm offering it is now ramping up hiring for their call centers. Is there a point when the hybrid model hits a wall in scaling efficiently, and AI-driven advice becomes handy?
What you’re pointing out is just the way that technology will automate things that I think can be more self-service or transactional, even choosing the right type of account. You could read a lot of literature, you could talk to someone or technology could help you get there. I think that’s a good consumer experience and I think that’s something advisors are actually probably pretty comfortable with letting their clients do that. And it will change the role of advisors over time but it will allow them to spend more time on the high-value, high-touch, financial planning, really thinking about lifestyle trade-offs, debating and discussing, helping them sort of analyze and translate what they’re seeing out of reports. So I think broadly advisors will focus a higher percentage of their time on high-value activities, quite frankly.

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How are you developing Schwab’s digital offerings for the future? What are the goals?
Our priorities are two-fold. Obviously driving growth and then evolving the products. In terms of growth there are so many investors out there who would benefit from either robo advice or hybrid advice, people who have never gotten any financial planning, who have never received professionally managed portfolios. We are working hard to introduce it to as many people as possible because we think it’s a broad benefit for investors and obviously then more direct growth.

In terms of our platforms and user experiences, I think we’ve built very good core offerings, and we’re continually making them easier to use and more accessible for investors. We’ll watch the market and think about what features we might need to add over time. I don’t see any big, glaring gaps right now, but we’re always investing because we think this is a core part of how investors will be served in the future so we want to make sure we continue to evolve.

Would that include potentially plugging these platforms into different products or offerings?
Certainly, we think about how this might integrate into someone’s financial life holistically and if there are things we need to do differently. The hybrid offer is sort of a first example of that. It’s not just the portfolio that answers, it’s the plan. But then there’s other ways to tie other parts of your financial life, absolutely, we’ll look at that. We’re exploring lots of things, but we don’t have anything on the drawing board.

What is it that you haven’t built yet, that you think you are going to have to build? And what are the things that you see coming that maybe much of the industry doesn’t see yet?
I think there are a couple of things we’ll need to build. For advisors we need to make the platform customizable in every way you can imagine, so they can plug it into their business however way they want. If they want to use our questionnaire, they can use it, if they don’t want to use our questionnaire, they don’t use it. If they want to convert a bunch of existing accounts in one button push they should be able to do it.

More broadly what we need is a better ability to have scalable, highly personalized conversations over text or email or whatever the mechanism, I think we need to develop that type of capability for not just these offers, but for offers generally. That’s where the industry needs to get to, that’s what I would want. I still might want to talk to my planner and I certainly will, but I’d love to be able to get much more automated but personalized communications. Not an email with a performance number, but actually contextual conversation about what is happening in my portfolio. I think there is lots of opportunity there.

There is real opportunity in our industry with chatbots for very transactional service. You see lots of people experimenting with it; I don’t know that anybody has really hit it out of the park yet. But that’s something that I hope to get to build.

Suleman Din

Suleman Din

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