FSRankings had the opportunity to interview Tobin McDaniel, Charles Schwab Senior Vice President, Digital Wealth Management. He spoke to us about Schwab Intelligent Portfolios, the brokerage’s robo-advisory offering.
1) What’s the latest AUM?
We introduced Intelligent Portfolios in March of 2015, so roughly two and a half years ago, and today it has around $20 billion in assets, making it one of the largest robo advisors in the market. There are a lot of investors out there who don’t want to build their own investment portfolio and don’t want to pay for a professional to do it either, so robo advisors like Intelligent Portfolios are an attractive option. Ultimately, a pure robo advisor does a few important things for people – it makes it easy to get started and stay on track, provides greater access to pretty sophisticated investment portfolios, and keeps costs low. That’s a proven recipe for better investing outcomes.
2) Intelligent Portfolios holds 6 to ~30% of assets in cash, which is fairly high. What would you say to potential customers who worry that strategy is too conservative?
Our approach at Schwab, and this has been consistent since Chuck started the firm more than 40 years ago, is that cash is an important asset class in a fully-diversified portfolio. Cash provides portfolio stability and diversification, which most long-term investors value in combination with realistic portfolio returns. In fact, we believe that smoothing out some of the inevitable volatility that occurs over time will keep more people invested and prevent them from trying to time the market, which is nearly impossible to do. How much cash someone has in an Intelligent Portfolios allocation depends on their risk tolerance and goals, but the typical client holds between 6 to 10 percent, which isn’t abnormal across the investing industry. We have seen third parties begin to track and compare performance across some of the most popular robo advisors, large and small, and while we believe performance is just one factor investors should care about in addition to costs and progress toward goals, Schwab has consistently been at or near the top when it comes to robo portfolio performance.
3) What is your take on Fama-French / Smart Beta? Has Charles Schwab’s research uncovered any benefit to value, size, and momentum?
Schwab Intelligent Portfolios uses a combination of market cap-weighted and fundamentally weighted methodologies to enhance the diversification of the portfolios. Our philosophy at Schwab is that both index structures should be used in combination to access the core markets and build portfolios with the potential for better results because they perform differently across market cycles. In the two and half years since we introduced Schwab Intelligent Portfolios, we have seen this level of diversification positively impact performance.
4) Some robo-advisors like Hedgeable have attempted to apply the latest exciting area – AI – towards portfolio management and security selection. What is your take on the role of AI in wealth management?
We are in the early stages of AI making an impact in our industry, but it’s a safe assumption that it will become incredibly important and central to client experience. At Schwab, we’re conducting R&D on AI, determining where and how to deploy it to our client base. Our focus is on utilizing it to enhance user experience, rather than portfolio creation or security selection. Today, we’ve got a very experienced team of investing experts who research and design the portfolios used for our robo advisor.
5) Will Charles Schwab advisers proactively reach out to customers during times of market distress to coach its customers to stay in the market and/or disable access to client funds in times of financial distress?
We would never disable access to client funds, but we certainly have conversations with clients during periods of market volatility and uncertainty. We also post and proactively share a lot of educational content and resources to help clients understand what’s happening in the markets and economy and how our robo portfolios are behaving, and we see strong engagement with that content.
It’s a common misconception that robo advisor clients don’t ever want to talk or interact with a professional. We have clients who are happy to not engage with us, and that’s fine, but we also see significant increases in clients contacting us during market volatility. For example, during the pretty extreme market volatility in early January 2016 and then again in June 2016 during the Brexit vote, we saw client calls increase around 30 percent and online chats increase between 10 to 15 percent. Most of these clients, 99 percent, didn’t make any changes to their portfolios – they just wanted to talk with a person to confirm they would be okay. If we didn’t have people available to talk with them, who knows how many might have pulled out of the market.
Overall, we think investment advice will increasingly trend toward a mix of technology and live professionals. Schwab Intelligent Portfolios is on the more technology-heavy end of the spectrum, although we do provide access to professionals through this service if clients need them. More recently, we introduced our hybrid service, Schwab Intelligent Advisory, for people who like to rely on technology, but also want a more holistic financial plan and access to live certified professionals. Schwab Intelligent Advisory combines an in-depth financial and investment plan, ongoing access to a team of certified financial planners, and automated robo portfolios – the same portfolios we use in Schwab Intelligent Portfolios. Our new hybrid service has a $25,000 minimum and a 0.28% advisory fee that caps at $900 per quarter, so very much aligned with our focus on making investing and financial planning more accessible to more people.
6) What percent of current AUM comes from existing Schwab customers vs. new ones?
About 25 percent of assets in Schwab Intelligent Portfolios are from new clients, and we expect that to increase over time. Among those new clients more than 40 percent are under the age of 40, so we’re seeing a lot of interest from younger investors who are new to Schwab. Overall amongst our retail clients at Schwab, we have $1 trillion of self-directed assets, meaning clients who are investing without any professional advice. We’re finding that Schwab Intelligent Portfolios is an attractive investing model for them, because cost is often a barrier. With Schwab Intelligent Portfolios, investors get a sophisticated automated portfolio without paying any advisory fee, so we’ve removed higher costs as a barrier for them.
7) What would you say to a potential customer weighing the choices between a pure play like Wealthfront or Betterment, versus a legacy broker who’s just getting into the space like Fidelity or Schwab? What factor do you think differentiates Intelligent Portfolios from other robo-advisors, particularly those of existing brokerages? Is the 0% management fee cited most often by clients?
If the growth of robo advice across the industry gets more people invested, then that’s a great thing. We like to think of Schwab as the original fintech start-up that began disrupting Wall Street more than 40 years ago, so it’s a positive thing to have firms of all sizes out there innovating on behalf of investors. But we think Schwab provides a combination of features and benefits that are unique compared to the smaller start-ups and, frankly, also to the established players who are starting to introduce their own services.
First, Schwab Intelligent Portfolios is the only automated investing service to charge no advisory fee, commission or account service fees – the only thing a client pays are the underlying ETF fees, which you would pay anywhere you invest, and we build our portfolios with low cost Schwab and third party ETFs. Second, we’ve built sophisticated institutional-quality portfolios with up to 20 different asset classes, and it’s remarkable to think that retail investors can now access portfolios like this with as little as $5,000 and pay no advisory fee. Third, our clients get the proven stability and security of a firm with more than 40 years of experience and more than $3 trillion in assets, in addition to the diverse range of products and services we have available such as Charles Schwab Bank and our more than 300 branches across the country.