Executive Summary
Last week Schwab announced the release of a new "robo" service, called Schwab Intelligent Advisory. And while the announcement was met with little attention from financial advisors, this announcement is a much bigger deal than most advisors and industry commentators have given it credit to be.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore what Schwab Intelligent Advisory really is, why it's not a robo, and why that actually means Schwab Intelligent Advisory is even more of a real threat to independent RIAs.
Because while the media instantly dubbed Schwab Intelligent Advisory as a "robo" service, it is actually much more. Schwab Intelligent Advisory provides comprehensive financial planning plus investment management, delivered by real CFPs, who are available 24/7, at a cost of just 28 basis points, and an account minimum of just $25,000.
In other words, Schwab Intelligent Advisory is truly designed to be a mass affluent financial planning and investment management solution. Schwab is clearly looking to compete with Vanguard's Personal Advisor Services (undercutting their 30 basis point cost), but Schwab Intelligent Advisory won't only be a competitor to Vanguard. Instead, the reality is that Schwab will be a threat to any advisor serving the mass affluent market – which is most of us in the independent RIA community!
Realistically, Schwab's intention is certainly not to go directly after the clients of advisors who utilize their custodial services - more likely Schwab sees an opportunity to fill the void when headcounts drop after salespeople can't meet DoL fiduciary - but one way or another, Schwab's marketing message is going to reach mass affluent investors, who will realize Schwab Intelligent Advisory's services look an awful lot like their existing advisor's (but at a much lower cost!).
Schwab's announcement is also bad news for robo-advisors, but potentially great news for the CFP Board. Disregarding Vanguard Personal Advisor Services (which isn't truly a robo), Schwab Intelligent Portfolios is currently the largest robo-advisor with more than $10 billion in AUM. That means that despite already being the largest robo, Schwab is shifting their attention towards a more comprehensive model that can actually take business away from other advisors, suggesting that when Schwab looks at its robo data, it sees the real opportunity isn't a pure robo after all! Fortunately for the CFP Board, if Schwab (and competitors) are successful, they are going to be hiring hundreds of CFPs, and continuing to drive demand for the designation as firms require their employees to pursue it.
Ultimately, the emergence of models like Schwab Intelligent Advisory will benefit consumers, but advisors must acknowledge that for anyone serving the mass affluent (which is most of us!), the marketplace is about to become much more challenging, and the crisis of differentiation is just going to keep getting worse.
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
Last week, Schwab announced the launch of a new service called Schwab Intelligent Advisory, coming in early 2017. While there was a little bit of buzz about it amongst financial advisors, I don't think it got the attention it deserves. For that reason, I want to talk about this new Schwab Intelligent Advisory offering on today's Office Hours.
Because I think this is a much bigger deal than most advisors and industry commentators have given it credit to be. Hopefully I won't get myself in trouble with anybody over at Schwab headquarters, but I think the significance - and threat - of Schwab Intelligent Advisory has really been underestimated by independent advisors.
But first, we need to understand just what the new solution really is.
What Is Schwab Intelligent Advisory? [Time - 0:59]
Schwab Intelligent Advisory fits into the category now being called a "hybrid" advisory service – in this case, a solution combining Schwab Intelligent Portfolios (their automated "robo" asset allocation solution), with live CFP certificants who will provide both upfront and ongoing financial planning advice by telephone or video conference.
As Schwab explains it, clients get access to comprehensive financial planning, ongoing guidance from planning consultants (who will all be CFP certificants!), automated diversified portfolio implementation with their robo service, and a customized financial planning dashboard that lets clients track progress towards their goals.
And they get all of this for the robo price of just 28 basis points, with a $25,000 investment account minimum. Now, to be fair, that's 28 basis points plus the costs of the underlying ETFs themselves. So 28 basis points is not the all-in fee – it's just the advisory fee – but it's a low advisory fee! And the onboarding will also be an entirely digital: paperless account opening, fund accounts using mobile check deposit, etc.
Schwab Intelligent Advisory Is Not A "Robo"! [Time - 2:05]
While the media instantly dubbed Schwab Intelligent Advisory as a new "robo" service, it's really not.
First of all, Schwab already has a robo service – it's called Schwab Intelligent Portfolios. This is different, because this is really a service that's not just an automated investment solution, but instead offers comprehensive financial planning with live CFP certificants, who just happens to implement with Schwab's robo solution.
Frankly, this really isn't all that different than Schwab's existing structure – where a prospective client could walk into any Schwab branch, work with a Schwab financial consultant, and be invested in any one of Schwab's managed account solutions (including Schwab Intelligent Portfolios). Now Schwab is simply doing it through a digital medium.
This is, to me, what I first dubbed a bunch of years ago as a "cyborg" solution. Joe Duran at United Capital later called it the "bionic advisor". It's a solution that is part technology, part human, blended together to serve client needs. In other words, calling this a robo solution is, I think, a mistake. It's not any more of a robo than Personal Capital or Vanguard Personal Advisor Services.
This is a comprehensive financial planning solution plus investment management delivered by real CFP certificants who will simply use technology to implement client portfolios (frankly, in the same way any of us do). The only difference is that Schwab Intelligent Advisory will be doing what most of us do today virtually, so their face-to-face meetings will be via teleconference rather than sitting across the table, as we do. But in exchange, Schwab is going to offer this for 28 basis points, rather than the typical 1% AUM fee that advisors charge clients under $1 million of AUM.
In fact, Schwab is so targeted on mass affluent with this that they've said not only is it 28 basis points with a minimum of $25,000, but they will cap the fee at $900 a quarter. Meaning effectively capped at $3,600 a year, which, if you do the math, is the fee for any portfolio above about $1.3 million.
Schwab Intelligent Advisory Is A Mass Affluent Financial Planning Solution [Time - 3:54]
Schwab Intelligent Advisory is mass affluent financial planning and investment management solution.
And it's worth noting, I don't think that pricing at 28 bps is just some random number they plucked out of thin air. It's meant to be a direct jab at Vanguard's Personal Advisor Services, which charges 30 basis points for financial planning from a virtual CFP with implementation to a diversified portfolio.
But the problem here is that this isn't just a price war competition between Schwab and Vanguard for their digital advice offerings. It's a threat to every single advisor that works with the mass affluent and is going to get caught up in the collateral damage here. That means most of us (especially in the independent RIA community) and particularly amongst those who are solo financial advisors.
In truth, I don't think Schwab launched this specifically to compete with independent RIAs, especially given that it's the largest custodian for independent RIAs. I actually think the primary target of the Schwab solution is the massive swath of mass affluent investors who are going to suddenly become available and looking for a new financial advisor when the DoL fiduciary rule rolls out in April.
Industry analysts like Cerulli are already saying that industry consolidation the decline in the financial advisor headcount is going to get accelerated by DoL fiduciary, as a lot of salespeople – who aren't really trained or educated to give advice or get paid for advice – are going to move on when they have to actually be accountable for their advice. This means there's going to be a lot of mass affluent investors who are about to lose their "financial advisor" (or at least their financial salesperson who said they were their advisor), and Schwab wants to fill the void.
It's also notable that for the past year or two, all the anti-fiduciary lobbyists have been saying the mass affluent won't be served in a fiduciary environment, and the irony here is that what we're now seeing is companies like Schwab and Vanguard saying, "Yeah, we sure as hell can serve the mass affluent marketplace under a fiduciary standard without commissions, and we're going to do it as level fee fiduciaries at one-third the typical fee of today's independent RIA!" So much for that argument, eh?
Is Schwab Intelligent Advisory Really Competition To Independent RIAs? [Time - 5:59]
Ultimately, while I don't think Schwab Intelligent Advisory was intended as a direct competitor to independent RIAs, it is going to be a direct competitor to independent RIAs.
This shouldn't be entirely surprising. Those of you who've been following Nerd's Eye View for a while know I've been warning about this for several years now – noting that companies like Vanguard, Schwab, and Fidelity have been doing major hiring spurts of CFP certificants and are increasingly morphing themselves from do-it-yourself training platforms and asset managers into full-fledged financial advisory firms.
Given their incredible size, scale, and existing brands, they have the potential to compete rapidly and aggressively. They can start gobbling up growth going forward. We've already seen this from Vanguard, which in barely two years lifted Vanguard Personal Advisor Services to over $40 billion of AUM (and the rumors are they've hired over 400 CFP certificants to provide financial planning advice!). Now we're simply seeing Schwab fall in line.
And let's not forget that last year when Fidelity bought their own comprehensive financial planning software when they bought eMoney Advisor. Anybody want to guess how long it's going to take until Fidelity offers their own digital advice solution, beyond the pure robo Fidelity Go they already launched?
I would point out here, if you custody with Schwab, I don't think this means Schwab is going to literally take your client list and start soliciting them for Schwab Intelligent Advisory, or anything like that. Schwab runs a clean business in that regard. But the reality is, our clients are going to start to get blanketed in the first half of 2017 with ads for Schwab Intelligent Advisory. It's going to be on billboards. It's going to be commercials. We saw the same thing with the Schwab Intelligent Portfolio launch. Schwab has the resources to do major advertising.
And at 28 basis points for comprehensive financial planning, access to CFP certificants 24/7 (which is more than what a lot of us offer!), diversified portfolios, a financial planning dashboard, etc... it's going to start looking like what a lot of us do today. But cheaper.
To be fair, I believe the depth of what many of us do as independent planners is much deeper and more comprehensive than what Schwab or Vanguard are going to be doing. In fact, Schwab's announcement even acknowledged that clients will actually onboard themselves into the planning software.
But as AdvisorTech commentator Bill Winterburg pointed out last week, what prospects see is: comprehensive financial planning, CFP certificants 24/7, diversified portfolios, a financial planning dashboard, etc... In other words, it's going to be hard for the average prospect to tell the difference between what big, major, trusted brand Schwab says, and what a small, solo advisory firm says. This is especially true given that Joel Bruckenstein and T3 Tech Club reported last week that the financial planning software solution that Schwab is using will reportedly be MoneyGuidePro, and particularly their new MyMoneyGuide Labs, to provide the onboarding experience for Schwab clients.
So to say the least, if that's really how it turns out, it's going to be pretty hard for independent advisors like us to differentiate ourselves when we say we do the same comprehensive financial planning investment management, and even provide it to clients with the same financial planning software!
Schwab Intelligent Advisory – A Death Knell For Robo-Advisors And Boon To CFP Board? [Time - 9:06]
The last thing worth pointing out about the launch of Schwab Intelligent Advisory, is that I think this is basically the death knell for actual robo advisors. As I've written earlier this year, the B2C robo advisors are already in serious trouble. Growth rates have fallen about a third of what they were a year ago.
At this point, most of the major players have already pivoted to the B2B channel or have been bought out entirely. The few left standing in the B2C channel are companies like Wealthfront (which had a recent CEO change as the founder came back in to what will likely be a pivot for the company) and Betterment, which may soon be the only pure B2C robo advisor left standing (and even they pivoted to offer 401(k) plans and an advisor solution, as well!).
To the extent that robo advisors were working at all, virtually all the growth has been through Vanguard Personal Advisor Services ($40 billion) and Schwab Intelligent Portfolios ($10 billion). Except, Vanguard's solution isn't really a robo – it's hundreds of CFP certificants! And now Schwab is saying they're not happy with their robo solution. They want to move beyond robo and offer human CFP certificants in preparation for a DoL fiduciary transition and the opportunity they see!
In other words, if Schwab, the largest "pure" robo advisor, actually thought robo was such a good model, why on earth would they launch a financial planner CFP service?! I think what we're actually seeing is Schwab is pivoting away from its robo, despite already having $10 billion in it (most of the money which has been rumored for the past year is really just coming from existing Schwab do-it-yourself clients who are switching into robo-managed accounts). While the robo is good business for Schwab (it's more profitable to have clients in robo accounts than clients who are DIY traders at $9.95 a trade), it's not attracting much new, external business for Schwab.
So I think what we're seeing is Schwab launch Schwab Intelligent Advisory because they see that as a real opportunity to get new business away from other advisors and brokers that are going to be dislocated in DoL fiduciary. Schwab sees an opportunity to use their scale to do it at lower cost while leveraging their brand for marketing purposes. But it's not willing to bank on the pure robo solution to get the job done!
It's worth noting that, from the perspective of financial planning as an emerging profession, I actually think the Schwab shift is really good news. If it works, Schwab's going to have to hire hundreds of CFPs. Vanguard's already hired hundreds of CFPs. Fidelity may soon hire hundreds more CFPs. I think what we're going to find SOON is that major companies like Vanguard, Schwab, and Fidelity are going to become the entry pathway for new financial advisors, similar to the role that the big four accounting firms play for CPAs... where you go to the Big Four first, you work there for a few years, you get your licenses and your credentials, and then you decide what you want to do next with your career.
And it's important to recognize that Schwab is primarily targeting this towards the mass affluent (down to $25k and up to $1.3 million) based on their price structure. I think that's Schwab's way of narrowing the focus and leaving room for their largest RIAs to not be as impacted by this. Because the reality that we know from the benchmarking studies is that larger RIAs primarily work with wealthier clients north of $1 million. And of course, Schwab has its own Private Client Group, into which I'm sure they will try to upsell Intelligent Advisory clients as their wealth increases beyond the $1 million mark. In other words, Schwab Intelligent Advisory is specifically intended to be for more mass affluent "downstream" investors than those served by Schwab's largest independent RIAs and their Private Client Group.
Yet, a huge portion of the independent advisor community serves the mass affluent. This is especially true amongst solo advisors, and I think it's going to be a real challenge for them to be competing with Schwab. I don't think Schwab is aiming for us directly, but I think we're going to take a hit. You might see a couple clients leave for a lower cost solution. I think the bigger challenge is simply that we're going to watch growth continue to slow for independent advisors. It's going to get harder and harder to win new clients. We're already seeing the decline in referral activity. Now you're going to see more price competition to compound the issue.
On the other hand, from the custody business perspective, this could actually be a boon to RIA custodians like Pershing and SSG, which don't have retail divisions to compete against independent RIAs. That may become a differentiator for them, to say, work with us, and at least we won't be in competition with you.
But the reality is, whether you custody with Schwab or not... whether you use Vanguard funds or not... whether you custody with Fidelity or TD Ameritrade, which already have retail divisions, have launched their own robo offerings, and I'm betting are going to launch their own digital advice CFP offerings soon... the competition is out there! And it's out there whether you custody with them or not. The real question is, what are you going to do to differentiate your advisory firm going forward to handle the competition that's coming?
Still, though, things look brighter for those who run a CFP certificant program. They should get ready for a big boost in enrollment in the next couple of years as more CFPs start coming in and getting pushed through by large firms. And this is notable because 2016 was already the best year for the number of people sitting for the CFP exam since 2007!
The bottom is simply this: Financial advice is on the rise. It's good for consumers. But it's going to be harder for those of us that already deliver it and are going to have to compete in a more challenging marketplace.
And in this increasingly competitive marketplace, recognize that Schwab Intelligent Advisory is not a robo advisor solution. It's comprehensive financial planning plus investment management for the affluent, at a very low cost, and delivered by a CFP certificant who just happens to be virtual.
For all of us financial advisors that have insisted that clients will pay more for a real face-to-face solution with a handshake at the end and the ability to sit across the desk from us, well, we're about to find out for real how much more people will pay for that.
I hope this is helpful food for thought. This is Office Hours with Michael Kitces, 1 p.m. East Coast time on Tuesdays. Thanks for joining us, everyone, and have a great day!
So what do you think? Is Schwab Intelligent Advisory a robo? A threat to the independent RIAs on their platform? Does this make it less appealing to custody with Schwab? Is this the death knell for B2C robo-advisors? Please share your thoughts in the comments below!
