Charles Schwab's release of its own automated investment product has launched a war of words between the firm and rivals in the digital space.

Schwab appeared to strike first, taking subtle digs at newer platforms such as Betterment and Wealthfront. The firm's Schwab Intelligent Portfolios was for "the investor looking to invest with an established company," Schwab executive vice president Naureen Hassan said in a call on Monday.

Hassan said Schwab's offering is "the only one of these automated advisory services with no fees," and it wasn't just "a service for young people getting started. This is appropriate for a pretty wide range of investors … this isn't just for millennials."

Schwab's product launch elicited a deeply personal response online from Wealthfront CEO Adam Nash.

"When I joined Wealthfront, I held up Charles Schwab as an example of a different type of company, a company with values to which we might aspire," he wrote in a blog post. "You can understand why it's disheartening to see those values broken. That Charles Schwab is gone."


Nash took issue with Schwab's claim that its product was free, pointing out that the offering will allocate anywhere from 6% to 30% of an investor's portfolio in cash holdings, from which the firm will extract net revenue earnings from interest.

"A 25-year-old investor who is just starting out, making $65,000 per year and saving 10% annually, could end up with over $138,000 less in retirement due to having a 6% cash allocation in Schwab's Intelligent Portfolios," Nash argues. "At 30%, it's almost criminal."

Schwab responded to Nash's comments with a press statement on its own website, calling his post "very misleading."

"Adam wishes he could build a moat around Wealthfront and protect it against competition," the post says. "But misrepresenting facts isn't the way to do that."

Schwab's commentary stated that the brokerage felt "for a medium to long-term investor, a 6% to 10% cash sleeve in a stand-alone diversified portfolio makes perfectly good sense and is where we think most investors in Schwab Intelligent Portfolios will initially land."

The editorial also returned Nash's criticism of fee structures.  "An investor in Schwab Intelligent Portfolios will pay no advisory or service fees and no commissions. At Wealthfront the $100,000 client pays 25 basis points and underlying ETF operating expense ratios."

Some of Nash's peers echoed his critique.  

Schwab Investment Portfolio "is clearly from an established financial services company," Jon Stein, CEO and founder of robo firm Betterment, says via a spokesman. "They've brought the classic 'bury-and-hide-the-fees' mentality to the space while misaligning their interests with the customers."

Stein additionally took issue with Hassan's suggestion that online platforms are aimed at young investors. "Betterment is not a platform just for millennials," he says. "We are far from that. We are for all investors looking for the smartest option. Our fastest-growing customer segment is 50+ years old which currently accounts for more than 20% of our business."


"We've clearly hit a nerve among robo advisors who are now challenged by our very straightforward, sophisticated, convenient portfolio solution at a lower all-in cost than they are able to provide," says a Schwab spokeswoman. "We encourage retail investors to look into all the existing offers and make decisions based on what best suits them."

One executive in the online brokerage space -- Hardeep Walia, CEO of Motif Investing -- says he finds the Schwab offering impressive, if still buggy.

"It's an intelligent approach," Walia says. "They have a huge advantage as the incumbent … If you're going up against a giant that created that, it's just a tough sell. If I were purely just a robo advisor, I would be worried."

"I like the bold new look," he adds. "It's a good first step.  I like that they differentiated this from the rest of their brand. They have customer service that can take calls, and it is free, with a lot of footnotes with that ... they deserve a lot of credit for getting it out to market."


Observing the debate, Aite Group senior analyst Sophie Louvel Schmitt noted in a blog post that though Schwab's cash allocation plan has attracted criticism, "the reality is that many investors do keep cash in their portfolios for risk mitigation and rebalancing purposes. Some brokerage firms are now starting to charge investors for the cash they hold in their portfolios."

She predicted that Schwab's offerings would prompt other firms to get into the automated investment advisory space.

The launch "will have a significant impact on the digital wealth management marketplace," she wrote. "We expect other online brokerage firms and banks will follow in Schwab's footsteps with announcements of their own this year. In 2015, the digital advisor model will get closer to mainstream, thanks to Schwab's new offer."

Read more:

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