Adam Nash makes direct 'CEO-to-CEO' plea to Schwab to rethink its robo

Here’s the actual link to the Schwab response. . . link above is non-functional. http://www.aboutschwab.com/press/statements/response-to-blog-by-wealthfront-ceo-adam-nash

PR people must have been up all night on this one. I think they had to respond, as the attack went for the jugular and questioned Schwab’s moral compass and ethics. Also credit Wealthfront’s PR strategy. Going from 0 to 2 billy in less than three years clearly instills confidence and begets a gutsy media approach.

Who needs the movies when you have the financial advisory realm in 2015? We got your drama right here.

The recriminations on whose approach to advisory services is best at this early stage emergence of Robo Advice are to be expected. Both Schwab and Wealthfront innovations are in the best interest of the investing public.

We are just now beginning long overdue innovation. The brokerage industry which wishes to avoid the rendering of advice to advert fiduciary duty and responsibility, has evaded innovation to great detriment of its competitive market position. The fiduciary leakage is immense, as is the bloated cost structure and ineffectiveness of conventional brokerage and the unsuitability of expensive packaged products that will not allow real time holdings data which makes the continuous comprehensive counsel required for fiduciary duty possible

The Schwab/Wealthfront counterpoint just scratches the surface of the advance of modernity in advisory services from the perspective of the best interests of the investing public. The reason why it may sound odd is that it outdates conventional thinking on brokerage, advisory services and todays outmoded technological capability. Investment methodology becomes the determinant of superior performance as it should, because it is truly an art form. But process, procedure, work flow and task are the key to making advisory services safe, scalable, easy to execute and manage as a high margin business at the advisor level. Expensive ad hoc sales outside of the context of all the client’s holdings (essential to adding value) are rendered obsolete.

Neither Schwab or Wealthfront are there yet, but with prudent process, they are the catalyst of a renaissance in advisory services which render an unprecedented level of investment and administrative counsel (true individualized advice) at a cost far lower than today’s packaged products. This is what the early stages of continuous comprehensive counsel (required by statute for advice) looks like.

This discussion is simply evidence that the other shoe is about to drop which outdates the old brokerage format and introduces modernity and advanced innovations which are indisputably in the client’s best interest. Process and technology preempt product. It is what one does with investment products (process) that adds value, not the product in and of itself.

SCW

It’s amusing to see Wealthfront and Schwab join the debate over which passive, low-cost portfolio management robot is better. Meanwhile, the elephant in the room is that the robos are going to have a very hard time keeping their clients when year after year of volatility and low returns show up on customer statements.

Asset management isn’t a commodity and all of the robos are treating as such. We believe the future of online investing – especially given the low return projections for the next decade – is a model that incorporates high-level thinking, professional advice on a technology platform that allows efficient communication with clients. We believe, when faced with the realities of high volatility and low returns from stocks and bonds, investors will demand professional, active portfolio management and liquid alternative investments.

We built a robo advisory service – technically, it’s an “online advisory service” because we don’t want robots (kid programmers in Silicon Valley) managing our clients’ money. We use real live human beings – seasoned portfolio managers. Our platform brings together professional active and alternative investment portfolio construction, one-on-one client services and low fees (0.50% per year).

I think firms like ours and Personal Capital have it right. In the end, all Schwab and Wealthfront have is a buy-and-hope robot and a sales pitch that sounds exactly like the old Wall Street axiom, “Don’t worry about your losses, Mr & Mrs. Jones, you’re invested for the long-term, remember?” But they never speak directly to their clients, so how will they feed them that line? On Facebook?

Frank Underwood would be proud of the spin-masters at Charles Schwab. All investors will see is Schwab (the brand name) and the free advisory service in their ads. Schwab is being disingenuous when it compares investors to used car buyers. There is no Carfax and no investor is going to review Schwab’s ADV at the SEC. It will be interesting to see what Schwab discloses in its service agreement. Chances are it will use vague language to disclose it derives revenue from its ETFs, third party products, and Schwab bank. It will be up to investors to read the document and understand what they are reading. It is too bad they did not use the Vanguard strategy.

I think it is very hard to say that “...innovations are in the best interest of the investing public.” I respect Mr. Wink’s judgment, and personally agree with him, but I would argue that what is clearly and not clearly in the public interest is a standard that is at best no longer clear. Schwab’s innovation, and it really is an innovation, is new and needs to be evaluated through a public discourse. When I started on “Wall Street” in the 70’s it was very clear what was right and what wrong. But the culture today is very different, far more complex and the regulatory structure is based on disclosure. Disclosure is not the same thing as right and wrong. We have yet to see how well it works for clients and for Schwab as they balance investment decisions with the ever-present pressure to continually increase profits in the short term. My point here is that as an industry we have a responsibility to collectively decide what is right and wrong, to define the point of going “to far”. We, and only we, can determine our collective ethics and morality. Regulators can guide us and even tell us when we gone too far subject to the restraint of the resources and political will.

Please excuse this if you find it pedantic but I do think we should focus on defining and doing what is “right” rather than what we can do.

March Madness!! Schwab and Vanguard are the Kentucky and Duke in this space…they will always have the best talent, technology, and will always find a way to win. Wealthfront, Betterment, Personal Capital, etc. were your Mercer, Gulf Coast, Cinderella teams trying to pull the ultimate upset…yet to fall short. Now for Fidelity to turn emoney into a robo and TD Ameritrade to find/buy one? Envestnet jumped in with Upside. Who’s next? Eventually all the custodians, wires, IBDs, and maybe even the Banks will have their own robo-advisor. This is not a trend. It’s here to stay. Now who can do it the best?