Price Pressure Weighs on Automated Investment Advisors

Signs of a price war are troubling for an industry known for its door-buster fees. Charles Schwab's forthcoming launch of its zero cost Intelligent Portfolios platform is another round in what quickly could become a life or death battle for many of today’s automated investment start-ups. As I discuss in a previous post, Schwab's decision to share details on its direct to consumer platform (to be launched in early 2015) followed the announcement of a Fidelity-Betterment partnership by a week. Schwab had originally revealed its intention to roll out such a platform in July, a few months after asset management rival Vanguard launched its low-cost Personal Advisory Service managed portfolio service. Now the time between salvos is shortening. A few days after Schwab’s announcement, TradeKing Advisors slashed charges on its Core portfolio offer to 25 bps, while matching Schwab’s $5000 entry minimum. It also eliminated first-year fees entirely. The clear but unstated message: investors don’t need to wait until some indeterminate point in 2015 to try fee-free automated investing. It is tough to top free (one automated competitor described Schwab’s move as an attempt to “freeze the market”) but give TradeKing Advisors credit for trying. Pressure will be on other automated advisors to respond in kind. While downward pressure on prices is good for investors, the implications are less sanguine for automated investment managers, particularly for those lacking a strongly differentiated value proposition. When does healthy competition become a race to the bottom? It seems we are nearing that kind of inflection point.