One of America's financial giants is stepping directly onto a startup's turf, and its founder couldn't be happier.
Charles Schwab, which controls $2.4 trillion worth of assets, announced Monday that it would launch an automated online investment advisor service, similar to that offered by the upstart Betterment (and its Bay Area–based rival Wealthfront). "This is really really exciting for us," Betterment Chief Executive Officer Jon Stein said in an interview with BuzzFeed News following the Schwab announcement.
Schwab said today it will offer a service similar to Betterment's, all with no advisory fees or commissions. While Charles Schwab Chief Executive Walt Bettinger wouldn't name a specific rival when asked by analysts, the offerings are remarkably similar to its smaller competitor: automated investment advice, access to a range of asset classes, and with automated tax optimization for accounts larger than $50,000.
The new offering suggests that Schwab "looked at the list of features that Betterment provides and said, oh yes, of course we'll provide those things," Stein said. "Today they're providing none of them."
Schwab won't launch the service until sometime in early 2015.
"It's a validation of our space, a space we created five years ago. We were once a voice in the wilderness saying investing is changing; now we have Charles Schwab finally entering the space," Stein said. He doesn't plan on changing course with Betterment in light of Schwab's decision to compete directly, and will focus instead on improving the core product. "We're built on smarter technology — that's what we do best," he said.
What Schwab will be able to do better than Betterment or any other startup competitor is aggressively market its new product, Schwab Intelligent Portfolios. The company said Monday that it has a marketing and advertising campaign scheduled for early next year to coincide with the service's launch. Betterment hopes that campaign will bring attention to the industry, particularly among customers who still hadn't considered using an online financial advisor.
One other way Schwab is looking to get around its competitors is the headline price of its service: zero. While Betterment and Wealthfront charge fees on top of the cost embedded in the funds it uses to construct its portfolios, Schwab will not be charging an advisory fee, although it will generate revenue from when it uses its own funds or from managing others.
Stein is skeptical of that too. "There's no such thing as free in financial services. Customers are paying for the service, it's just not as transparent as our services," Stein said. "They're paying perhaps through suboptimal asset allocation through Schwab ETFs, perhaps through suboptimal bid-offer spreads or payment for order flow or through the expense ratio in their ETFs."
"Investors will see that Schwab's selection of ETFs will be based on objective criteria and driven by obligation to do right by investors as a fiduciary," said Alison Wertheim, a Charles Schwab spokesperson. "Investors using Betterment are carrying the costs of underlying investments, plus a portfolio advisory fee. We've broken that mold."
Ultimately, Stein sees more awareness of automated investing as a positive for his own company, which has amassed $925 million in assets. "There was a lot of hand wringing and alarm when Barnes & Noble entered the online book-selling space to compete against Amazon. In that case the technology company won, and I think it's not a perfect parallel, but I think we have a lot of advantages in our smarter technology."
This post has been updated with a statement from a Charles Schwab spokesperson.
Betterment has $925 million in assets under management. An earlier version of this post misstated this number.