If you think the current battle between Schwab and the robos is just an amusing distraction, think again. If you don't adapt, you might become collateral damage to a battle that is just picking up steam.
I have been watching this clash with some surprise at the independent robo-adviser's strong reaction to
Schwab's new robo offering. Frankly, the public conflict has started sooner than I expected. First, there was
the open letter from the chief executive of Wealthfront, attacking Schwab's offering. Then, on March 13, Jon Stein, CEO of Betterment,
went on CNBC and continued the attack, nonchalantly stating that Schwab was “too late” to the game. I know Jon well and he is a lovely and brilliant guy, but the idea that the participants in this market have already established and taken all available ground is not rational.
The collective size of all the robos together is still miniscule, and the market is still rapidly evolving. Heck,
Vanguard began offering Personal Advisor Services, an adviser-led solution for 0.3% that includes planning and video chat with systematic rebalancing, et.al., about a year ago. Vanguard's offering has already attracted $5 billion, an amount in excess of any of the robos in their collective history, and it's still in beta until this summer. Vanguard is only just getting started, and no doubt many of the other mega financial consumer brands will be just as successful.
Normally a spat between a couple of competitors is something I enjoy watching as a distraction. But this battle is one that is just starting, and, unfortunately, it will have far reaching ramifications for every financial adviser in the industry. There are three consequences of this escalating battle that will change the landscape for everyone over the next few years:
1. The race to zero
Schwab's new service is free. That means you can go online, build a portfolio, rebalance it and make systematic contributions and withdrawals at no visual cost. That makes the 15 to 40 bps that the robos charge appear lofty. How does that make the 1% that many advisers charge for the same service look? Here's the reality: Once everyone expects investments to be free, everything looks expensive by comparison. That's bad for pricing for everyone because every dollar higher than zero in fees will have to be justified. It happened with travel agencies, and it's now happening in our back yard. The robos are all puny, and although I see commercials for several of them running on CNBC, their operating budgets are a rounding error of Schwab, Vanguard and Fidelity. Many will no doubt fail as the cost of customer acquisition increases with competition. But make no mistake: The public battle over who is cheapest will mean pricing will be pressured down. Unfortunately, this public feud and ensuing advertising war will make it happen quicker than any of us might like.
2. Uncomfortable transparency
So it appears that the primary line of defense for robo-advisers is that there are hidden costs in the “free” offering from Schwab and that it is somehow deceiving consumers. These hidden costs are very modest; the internal costs of the proprietary and external ETFs that Schwab uses are still really low, and the fact that the cash account has higher internal costs is a rounding error in this day and age. Unfortunately, the egging on by the robos can very easily be squashed by Schwab if it simply illustrates the all-in costs, soup to nuts, for its solution compared with Vanguard and the independent robos. The more transparent everything is, the better it is for consumers — but it will require a real assessment of what you and your services are worth compared with the alternatives. Your current and future clients will have far more ways to see and understand all of the internal and external costs and fees associated with all investment solutions.
3. Bionic advisers on the standby
This might be the most dangerous aspect of how this battle unfolds for the average independent adviser. You can bet that all of these direct-to-consumer firms will expand on their offerings and provide premium services sooner than later (“freemium” is the term of art for this in the Internet space), and that means adding people to help. Vanguard is already bigger than most of these robo firms; Schwab will no doubt dwarf all of them in terms of size soon, too.
The big risk for all independent advisers is when these tech-enabled firms add more humans and specialized help to the mix for a modestly higher price. The advisers at these firms might not be as good as you, but they will be available at a fraction of the cost.
According to a report in InvestmentNews, Vanguard has hired a number of advisers (most of whom are CFPs). And before you say it, the client will get personal service because Vanguard claims it will give you a dedicated planner once you have over $500,000. Over time, Schwab, Betterment, Wealthfront, et.al., will probably replicate this blueprint. The flood of advertising and marketing that these firms will all spend money on will only expand the problem.
Every independent adviser will have to become more bionic themselves in order to add scale and client automation to their firm. Specialization will also be very important to create unique service markets.
A fork in the road
In most of the English speaking world, the standards for advisers are being radically changed by regulation. In the United Kingdom, by 2016, no adviser can charge a commission and every client has to have complete transparency in costs; same is true in Australia and Canada (although timing for implementation is different in each country). In our country, the free markets are taking us to the same place. There is no escaping the consumer revolution.
Now the simple question is: Do you march down the road of progress voluntarily and take advantage of the battle unfolding, or do you and your practice become an innocent casualty of their battle?
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.
