Human advisors using services provided by Charles Schwab and TD Ameritrade won’t be the only group affected by the quality of the integration of the two firms. Migrating TD Ameritrade’s automated digital investing platforms, called Essential Portfolios and Selective Portfolios, into Schwab’s robo advisor, Intelligent Portfolios, could create a headache for the merged firms. A big reason for the complexity is Schwab’s use of its own proprietary ETFs in Intelligent Portfolios.
In fact, the migration of TD Ameritrade digital advice clients into the Schwab fold would amount to a conflict of interest, noted David Goldstone, head of research at Backend Benchmarking, which publishes The Robo Report. “It will be interesting to see how Schwab handles portfolio construction if, and when, TD's digital advice clients are migrated to Intelligent Portfolios. Specifically, how will Schwab handle the tax consequences of transitioning clients?” asked Goldstone.
“Migrating all clients to a single model portfolio framework is desirable for Schwab when it comes to scalability and efficiency,” he explained. “But realizing taxable gains, to trade out of current TD portfolios [and] migrate to Schwab-built portfolios, creates a conflict of interest between the client and the firm—especially when the new portfolios contain proprietary ETFs.” Of the TD Ameritrade robo strategies evaluated by Backend Benchmarking, there are no Schwab ETFs, added Goldstone.
Schwab would do well to examine a situation encountered by SoFi earlier this year. The fintech firm found itself in hot water with clients when it fumbled its rollout of, and investment in, proprietary zero-fee funds, creating tax headaches for clients.
In April, it sold investors’ positions in Vanguard Group funds and invested in its own exchange traded funds. In that case, SoFi argued that the tax consequences of the fund swap was simply part of the cost paid for the overall convenience of using a robo advisor.
But the firm eventually ended up paying money to customers affected by unexpected capital-gains taxes.
Schwab could face a similar situation in its own integration of TD Ameritrade’s digital advice clients. “Most likely” Essential and Selective Portfolios will be converted to the Intelligent Portfolios platform, Goldstone said.
Schwab has referred requests for comment on the details of the integration to its press release and FAQs, which do not provide specifics on the integration of both firms' robo advisors.
“Integration always takes time so it is unclear how long it will be before we see an integration of the two services,” Goldstone added. “It will be interesting to see how Schwab handles this conflict of interest for digital advice clients."