Charles Schwab has landed its second powerful robo punch in as many weeks.

Quickly following its controversial retail robo advisor service launch, the financial services giant unveiled its highly anticipated robo offering for advisors, Institutional Intelligent Portfolios, set to roll out in the second quarter.

Rapid consumer acceptance of robo advisors and digital services was a driving force behind the new digital platform says Bernie Clark, Schwab Advisor Services’ executive vice president.

"Automated investment management is here to stay," Clark says. "Our success has been built on helping our clients grow and we were worried they would be would be at a competitive disadvantage."

Indeed, Schwab's robo rollout for advisors may force other large custodians to rethink their own automated investment strategies, says Alois Pirker, research director, for Boston-based Aite Group.

"Schwab's competitors are going to have to take a closer look at this," Pirker says. "The fact that Schwab's platform is customized, fee-flexible and integrated with the custodian's platform gives them a big leg up."

Advisors will be able to put their own brand on the new digital platform which will feature a selection of 200 ETFs drawn from 28 asset classes, automated rebalancing, performance reporting, integration with Schwab systems and tax loss harvesting for accounts greater than $50,000.

RIA firms that have less than $100 million in assets under management will be charged a 10 basis point fee. Firms with more than $100 million in AUM at Schwab will not be charged. Nor will clients of either type of firm be charged account service fees, trading commissions or custody fees.


However, portfolios on the digital platform must keep a minimum of 4% in cash in Schwab Bank generating an indexed, market-based interest rate for clients -- and a source of revenue for Schwab.

The cash requirement of the retail digital service, Schwab Intelligent Portfolios, ranging from 6% to 30% of the portfolio, drew considerable criticism for allegedly obfuscating Schwab's claim that the offering was "free."

But Clark strongly defended the cash component.

“The 4% cash balance is used to support the platform, for liquidity features and for services such as rebalancing and tax loss harvesting,” he says. “Many advisors recommend cash balances between 7% and 9%. During stress periods that can be as much as 15% to 20%. And given advisors’ fiduciary duty, cash is important in a portfolio because it’s not correlated to other asset classes. ”

Clark also made clear Schwab sees Institutional Intelligent Portfolios as a support service for advisors and not a profit center.

“We’ve built our success on helping clients, and we see [IIP] as complementary,” he says. “The robo offering should supplement an advisor’s existing business and allow them to serve clients who have less than the minimum investable assets as well as the next generation who want technology as part of their service.”

In addition to attracting younger clients seeking a Web-centric investment service and new clients with assets below an advisors' minimum, advisors can also charge a fee for IIP, one that most observers predict will compete with existing robo advisors and be well below 1% of AUM.


According to Schwab research, 56% of advisors surveyed believe automated investment management could supplement their current offerings and help drive growth. What's more, nearly eight out of 10 firms are already serving clients with assets below the firms' stated minimum.

More than 2,900 Schwab Advisor Services clients heard details about IIP on a company webcast today. Reaction appeared to be favorable, although tinged with a wait-and-see approach.

“I was pleased to see Schwab act so quickly and recognize the importance of being able to provide a digital platform to firms not in a position to build it themselves,” says Ken Hart, chief executive of Cornerstone Advisors in Bellevue, Wash.

But Cornerstone, which has a $1 million investable asset minimum for new wealth management clients, and a $5 million minimum for family office clients, doesn’t want to pursue a new target market with lower minimums, Hart says.


Instead, he sees the new robo offering as a way to “get ready for clients in the future who will have those wealth levels but will want to engage [with advisors] in a different way.”

In addition, IIP’s passive index ETF investing strategy “doesn’t line up with our investing approach,” Hart says. As a result, Cornerstone will familiarize itself with Schwab’s inaugural digital platform internally but “wait for newer versions” to roll out publicly.

The passive index approach was also problematic for Northeast Financial Consultants, a Westport, Conn., wealth management Schwab client. “We do not plan to use it,” says Elwood Davis, president of the firm. “Our customer base is ultrahigh-net-worth with alternative investments. We do not see it as a fit.”

Boston-based Colony Group, one of Schwab's biggest custodial clients, also has a high-net-worth  target market, but will kick the new platform's tires, says CEO Michael Nathanson.

"I don’t see how we have any choice but to look at it," Nathanson says. "It offers flexibility, some investment depth in a low-cost structure. It is intriguing, [but] whether we use it immediately remains to be seen."


But many advisors will benefit immediately from Schwab’s approach, says Kenneth Hoffman, managing director and president of Optima Group, the Fairfield, Conn.-based research and consulting firm.

“The ability of RIAs to customize the program means they can target asset classes for diversification and tax efficiency while emphasizing the asset classes they feel are positioned well to perform,” Hoffman says. “This should help RIAs add efficiency to their business, and deliver value to their smaller clients as easily as they manage larger relationships."

What's more, according to Hoffman, Schwab can now "leapfrog other robo advisors by directly accessing the institutional as well as the retail marketplace.”


Not surprisingly, Schwab’s robo advisor competitors disagree.

“The real issue for Charles Schwab and their current offerings is their long list of internal conflicts,” charges Adam Nash, chief executive of Wealthfront, the largest robo advisor with over $2 billion in assets. “For the consumer product, are they doing what's best for the client, or what's best for Schwab Bank? For the institutional product, are they really focused in building a platform for RIAs, or competing with them directly with the consumer product? These are very early days for automated services, and it's not clear whether Schwab is focused on enabling advisors or competing with them.”

Betterment, which launched its own institutional platform for advisors earlier this year, claims to have nearly 100 advisory firms already signed up.

"The response to our institutional offering has proven there is an overwhelming demand for a digital-first offering for the RIA market,” says Betterment CEO Jon Stein.

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