Outlining his firm’s strategy for battling digital disruption, Schwab CEO Walt Bettinger envisioned it would push client asset revenues lower, while relying on its brand and established market share to grow.
“We will leverage our scale, which makes our moat wider and wider, and less attractive for some firms to try and disrupt us,” Bettinger said at The Economist’s Finance Disrupted event in New York City.
Reacting to his statement, industry observers expect an uphill slog for independents as the largest firms gear up for a price war on three fronts: financial advice, online trading and ETFs.
“Fidelity, Vanguard, Schwab and BlackRock will be the big four here,” says Celent analyst Will Trout. “Everyone else needs to go find their oxygen tanks.”
An early study by A.T. Kearney predicted incumbents would slash prices to compete with robo advice upstarts. While that never came to pass, the 2015 study still predicted industry revenues would drop by as much as $12 billion by 2020.
Advances in technology and consumer demands have instead driven fee compression, says Trout. “Schwab understands better than most that most of the functions that underpin investment management can be automated, and are therefore subject to commoditization.
“Portfolio manufacturing and rebalancing is already a commodity,” he adds. “That's why Schwab charges no fee for it. So why not get ahead of the game and grow the AUM base, make client relationships stickier and more all-embracing?”
THROWING WEIGHT AROUND
It would be a mistake by young firms to dismiss such a public pronouncement, says Sean McDermott, senior analyst at Corporate Insight.
“[Schwab has] $3 trillion in client assets. They have very positive brand recognition and customer satisfaction scores that are the envy of most of the industry. They have demonstrated a willingness to cut price to gain market share, as seen with their recent commission cuts in online trading. So yes, they can throw their weight around.”
(Earlier this year, Schwab, Fidelity lowered retail commissions on online trades to $4.95, and TD Ameritrade lowered its trading commissions to $6.95.)
The wisdom of possessing a trifurcated digital advice offering — Schwab Intelligent Portfolios, a digital-only service, an institutional platform for RIAs, and the hybrid robo advisor Schwab Intelligent Advisory — also becomes clearer, McDermott notes. (Schwab’s robo now has $20 billion in AUM).
“Where firms will differ is in terms of the customer experience and the degree to which human help is available. On the latter point, Schwab offers access to human advice through Schwab Intelligent Advisors at a lower minimum and price point than competitors do.”
Schwab recently bolstered its ranks in its digital offerings, the firm confirmed, hiring former Betterment for Business General Manager Cynthia Loh as vice president of digital wealth management and innovation.
The other lever that large firms like Schwab have to pull are their products, Trout says. Schwab, Vanguard, Fidelity and BlackRock all manufacture the ETFs that underlie many of the digital advice platforms in the market, in addition to their own offerings.
“The flip side of distribution is manufacturing, they have to get more ETFs in the hands of intermediaries and end clients,” Trout says. “Both strategies need to be in place in order to win.”
LAST GENERATION’S WAR?
Those among digital-first advice firms wondered privately if Bettinger was not speaking to them, but rather to the new crop of millennial-focused digital offerings, such as Acorns, Stash and SoFi, which tout modest amounts in total AUM, but possess subscribers in the hundreds of thousands.
Robo advice is expected to collectively top $1 trillion in assets under management in fewer than five years, according to Boston-based consulting firm Aite Group. But micro-investing will partly feed such growth, it predicts, noting over 60% of millennials already are subscribed to such apps.
Bettinger’s rhetoric seemed off-the-mark, says one technology executive.
“Honestly, I think that was the last generation’s war,” he says. “I don’t see clients moving or staying because of price. When Schwab Intelligent Portfolios launched, clients came because they made it easy for them to do so.
“That’s not something that Schwab has a stranglehold on. In fact, smaller players can always compete because they are more nimble. In wealth management, client experience wins the day, always.”
The allure of new technology-driven retail is both the fresh feeling of the transaction, he says, and the savings gained not in money, but convenience.
“People aren’t going to robos for price; they are going for a great experience. They can understand what’s going on with their wealth at 3 a.m. They don’t have to wait for a Schwab advisor to come into the office.
“I buy from Amazon, it’s amazing and easy. I just say what I need and it’s ordered. Am I paying more than if I went to Target? I don’t know and I don’t care. It’s easy and I liked it. That time saved is as much an ROI for me as anything else.”
There’s also the investing market as a whole to consider, adds Tim Welsh, president of consulting firm Nexus Strategy.
The Aite study notes 8% of discretionary accounts came from robo advisors in 2016, up from 1% in 2014. By the end of this year, that total will be 17%.
Even the largest firms control just percentages of the entire investment market, Welsh says. “There’s room for everybody.”