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Charles Schwab Undercuts Silicon Valley, Offers Online Financial Advice For Free

The service is a howitzer pointed at startups who have tried to steal business from Schwab and other old-school brokerages and advisers.

Posted on October 27, 2014, at 1:48 p.m. ET

Jim Young / Reuters / Reuters

Charles Schwab, one of the nation's largest brokerages and financial advisers, is going full robot. The San Francisco-based company said today it will launch an automated online investment advisory service sometime in the first quarter of 2015, in competition with a new breed of online financial players that are chasing after the industry's old guard.

The company wants the service to address demand for "sophisticated low cost investment advice," Chief Executive Officer Walt Bettinger said on a call with analysts today.

The program, which will be called Schwab Intelligent Portfolios, will compete directly with the startups that are trying to steal market share from brokerage and fund giants like Schwab by offering cheap online services that allocate savings into broad stock and bond indices.

The Schwab service, along with those it competes with, is most squarely targeted at investors who have some money saved besides a 401(k) or a pension, but not enough to require a full-service financial adviser. Charles Schwab became a $35 billion company by serving precisely these investors through its brokerage business, which let them invest the money themselves in stocks, as well as by managing a range of investment funds for customers to park their money in.

The new online services are particularly appealing to investors who live online and want services that are native to the web. "For clients who are technology savvy," said Naureen Hassan, the senior vice president of Schwab Intelligent Portfolio, "it can be a lifetime offering."

But that lucrative and profitable market of investors is now being targeted by a number of startups that offer investment advice, funds to invest in, and even software tools that recommend when to sell assets to optimize tax liabilities. This, all delivered over the web and primarily by computers, not well-compensated humans, has become a cheaper option, as well as one that appeals to customers who expect a slick online interface.

Schwab's rhetoric is nearly identical to its startup competitors, despite being the exact type of company they're trying to displace. "One of the biggest barriers for people receiving good investment advice is the cost of that advice," Hassan said. "We wanted to bring investment advice to everyone at all levels."

Investors have been defecting to the new competitors, and those are the people that Schwab is now deploying its massive resources to win back — in part by offering the service for free.

Bettinger, the Schwab CEO, said today that the service would also target do-it-yourself investors that are "fee-sensitive," and looking for cheap investment advice. Startup automated investment advisers like Betterment and Wealthfront have been accumulating assets at a rapid clip, as investors are attracted to their low fees and academic investing formulas.

Those formulas, known as portfolio theory, identify the best way to allocate an individual's investments over time, based on their tolerance for risk. For low-cost online services, they help a computer do the work often done by highly-paid humans.

The Schwab service, which the company said will launch in the first quarter of next year, provides a largely similar offering to Wealthfront and Betterment. It will be automated, investing a client's assets based on their answers to an online questionnaire, and will adjust their investment mix over time. It will also be "developed for ease of use and completely technology enabled for today's investor," Bettinger said, meaning it will be paperless and "device agnostic." The big differences, Schwab says, are cost, service, and sophistication.

That includes 24-hour live customer support and no advisory fees, no commissions on trades, and no fees on accounts. Schwab will generate revenue, it said, through the Schwab funds that customers can invest in, and from managing exchange-traded funds from other providers.

Betterment, the New York based investment advisory startup, recently launched a partnership with Fidelity, the Boston-based fund and brokerage behemoth, to offer its services to the almost 3,000 independent investment advisers Fidelity works with through its Institutional Wealth Services platform. Schwab said it will offer a similar program to the investment advisers it works with "shortly after" it launches for retail customers.


Wealthfront, the biggest of the so-called robo advisers, has over $1 billion in client assets, while Betterment, a New York-based adviser, has $875 million. Both are drops in the multi-trillion dollar bucket of total assets under management in America. One attraction of current automated investment advisers is how cheap they are: Wealthfront charges .25% for client balances over $10,000 while Betterment charges .35% to .15% depending on the size of the balance. Schwab will charge nothing.

Managed accounts from old-school advisory services, even ones that just hold cheap exchange traded funds, can cost around 1% of client assets, while individual funds and personalized investment advisory services can be even more expensive. Schwab, however, is trying to compete on price, even if it means potentially cannibalizing its existing services. "This is about clients and delivering to clients solutions to their best interest," Bettinger said on the call. "We've never been afraid to cannibalize parts of ourselves historically."

Schwab oversees some $2.4 trillion in client assets and, through its relationship with independent financial advisers and its own advisory services, it has $1.19 trillion in assets that receive "some advisory service." Schwab, which started as a discount brokerage, has been moving more and more of its business into some kind of fee-based advisory service. "Fifty percent of client assets are under some form of fee-based investment advisory relationship, a long way from the discount brokerage of Schwab four decades ago," Bettinger said.

Reuters reported three weeks ago that Schwab was planning on offering its own automated investment advisory service. Reuters reported, citing conversations with Schwab executives, that the service was being developed internally and would be "likely" free.

Wealthfront especially has made it clear that it's looking to grow to the scale of Schwab, its rival that is also based in the San Francisco Bay Area. "Wealthfront reached $1 billion in assets in less than half the time it took Schwab," the company said in a blog post in June. "We hope that by focusing on Millennials the way Schwab focused on Baby Boomers, we can continue our rapid growth to $10 billion, $100 billion, and beyond."

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