Two weeks after it launched Schwab Intelligent Portfolios, becoming the first custodian to launch an automated portfolio allocation service for retail investors, Schwab is making the technology the backbone of an account management tool for registered investment advisors.
Called Institutional Intelligent Portfolios, the so-called “robo-advisor” platform allows RIAs custodied with Schwab to open and fund new client accounts and create portfolios allocated across 200 ETFs and 28 asset classes under four broad investment strategies: Taxable accounts, IRAs, municipal bonds and income-based portfolios. Tax-loss harvesting strategies are also available for portfolios on the platform over $50,000.
Advisors can customize the portfolios, and the software automatically rebalances the accounts and imports performance data into a client-facing web portal and mobile app, which RIA firms can brand with their firm’s name, logo and contact information.
Like other robo-advisors, Schwab said automating the investment side lets advisors focus on client engagement, financial planning and firm growth while meeting the growing demand for online access to portfolios.
“Automated investment management is a transformative topic in our industry today,” said Schwab Intelligent Portfolio's executive vice president Naureen Hassan. “Technology advancements, new market entrants and shifting consumer preferences for conducting more of their business online are driving this movement to investment automation.”
Institutional Intelligent Portfolios integrates with Schwab Advisor Center, the website that provides custody, trading and support services, to work with advisors’ existing workflow. Schwab Advisor Services’ executive vice president Bernie Clark said this seamless transition was a top priority and a reason why Schwab built it’s own platform instead of acquiring or partnering with a third party.
“We see this as being so fundamentally core to our platform going forward, we wanted to build with no compromises,” Clark said. “[We wanted to] build in a way that was holistic to our client base, both retail and advisors, [and] leverages the capabilities of our firm most effectively. I think you’re seeing that leverage across the offer, the capabilities, the flexibility and the pricing.”
Advisors will pay 10 basis points for accounts with less than $100 million in assets under management custodied at Schwab, exclusive of assets held in Institutional Intelligent Portfolios. There is no charge for accounts with more than $100 million AUM.
Accounts can be as small as $5,000, allowing advisors to expand their services to clients with fewer investable assets than they traditionally require. The firm expects the offering will appeal to advisors who want to reach tech-savvy millennials, or children of current clients. Advisors using Institutional Intelligent Portfolios can determine their own management fees, and Schwab won’t charge advisors’ clients with service fees, trading commissions or custody fees.
The Cash Debate
Schwab makes its money from the Schwab ETF fees, third-party ETFs that are allowed onto the platform, and revenue from the market centers were ETF trade orders are routed.
Schwab will also require advisors keep a 4 percent minimum cash allocation in the portfolio, where Schwab can make money off the spread between their return on the cash and the interest paid to the client. The cash requirement was the focus of some criticism of the retail version of Intelligent Portfolios (where the minimum requirement is 7 percent cash for the most risk-tolerant investor) and will likely be the most contentious part of the advisor-facing platform.
Adam Nash accused Schwab of deceiving retail investors by promoting Intelligent Portfolios as a free service and said cash allocations and expensive “smart beta” ETFs will cost investors thousands. Betterment CEO Jon Stein echoed the sentiment, telling Buzzfeed that Schwab was “mistreating customers” and wondering if Charles Schwab himself allocates that much cash in his own portfolio. Dan Egan, Betterment’s director of behavioral finance and investments, wrote on the company’s blog that cash doesn’t belong in any moderate to long-term investment portfolio.
“It’s pretty plain and simple: Cash is not a good investment,” Egan said. “After taxes, inflation, and its current expected return (zero), you are actually losing money when you hold cash in your investment portfolio over the long term. In other words, cash is a drag on your returns.”
Clark defended the cash allocation feature as a defense mechanism that provides a portfolio with stability during volatile markets. He added that cash is necessary for liquidity in rebalancing, provides portfolios with safety and security, and that the firm’s two decades’ worth of experience and $2.46 trillions in assets gives the strategy credibility with investors and advisors.
“Automated investment management is here to stay and our goal is to ensure that our advisors are prepared to participate in this potential growth opportunity on their terms in the most seamless way possible,” Clark said in a statement. “We have been working closely with advisor groups over the part year to shape our offer so that it meets RIA’s needs.”
Institutional Intelligent Portfolios expects to launch sometime in the second quarter, but Clark said he expects it will have a gradual adoption rate as advisors take time to communicate the program with their clients and consider how to integrate the platform into their business model.