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The Custodians Enter the Automated Advice Wars

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28 October 2014
William Trout
Broker-custodian Charles Schwab’s eagerness to share details on its zero cost automated investments platform reflects the fact that it has essentially been trumped by arch rival Fidelity, which announced last week it was partnering with Betterment to distribute automated investments advice to clients via its RIA network. Unlike the Fidelity offer, the Schwab platform will be offered direct to consumers, with a white label version to be offered later to Schwab’s network of advisors. The Schwab announcement follows what has essentially been radio silence since Schwab CEO Walt Bettinger revealed plans to launch an automated platform last summer. Some thoughts:
  • The automated investments business is fundamentally a software play (if you can write the code, you can start up an automated advisor) with low barriers to entry, and Schwab’s decision to offer algorithm-driven portfolio management services for free is a troubling sign for an industry already offering door buster fees. We may be seeing the acceleration of a race to the bottom in terms of pricing. The end result: curtains or at least consolidation for many of today’s crop of automated advisors.
  • Schwab’s decision to offer its platform to consumers for free is unlikely to go over well with its captive network of advisors (i.e. those who use Schwab for custody purposes), who will feel undercut by their custodian. The advisors will be even less happy if they have to pay fees (for example, for the branding of their web sites) for a platform that their customers can access for free. The most important thing to note, however, is that the Schwab move puts downward pressure on the RIAs’ high fees, even if the RIAs claim they are offering a better, more personalized service than the automated advisors.
From a strategic standpoint, Fidelity’s ability to get a leg up on arch-rival broker-custodian Schwab speaks to the challenges custodians and online brokers face once they decide to launch an automated advice platform. Should they build their own, as Schwab is seeking to do, buy a startup automated advisor, or partner a la Fidelity? I’ll share some of the thinking around these considerations in a subsequent blog post.

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