Schwab 'robo-adviser' bets big on cash and 'smart' beta
Brokerage platform will use asset-allocation strategies of disputed merit with retail clients
Look under the hood of Charles Schwab Corp.'s “robo-adviser” and you'll find a good amount of cash and the handiwork of a goateed gentleman named Rob Arnott.
Schwab will make extensive use of index-based investment strategies popularized largely by Mr. Arnott in a digital investment offering it plans to unveil soon, according to an InvestmentNews analysis of disclosures made by the brokerage.
Schwab Intelligent Portfolios, the firm's first big push into the booming world of digitized wealth management and investment portfolios, is scheduled to launch before the end of March.
In an extensive set of disclosures about the fund-selection criteria, the San Francisco-based firm has given its first indication of how it will construct portfolios for clients of the service (think, passive), which products it will use (think, ETFs) and how much it will cost investors (it's complicated).
Neither Mr. Arnott's name nor that of his Newport Beach, Calif.-based firm, Research Affiliates, appear in the disclosures. Yet among the more eye-popping revelations in those documents, Schwab will make substantial allocations to a range of its own proprietary products that rely on indexes developed and popularized in large part by Research Affiliates.
A Schwab spokesman, Michael Cianfrocca, said officials were not available for comment.
Research Affiliates' Rob Arnott (Bloomberg News)
Schwab will make sizable allocations of investor money to cash held at a Schwab-affiliated bank, a fact which has drawn attention because Schwab is earning a good portion of its revenue on the program from reinvesting those dollars. The allocations could be about 7% for a hypothetical 30-year-old, aggressive investor and 15% for a more conservative 65-year-old, according to the disclosure.
Schwab's choices drew skepticism from financial advisers, whose profession continues to grapple with the implications of a small-but-growing group of robo-advisers that may threaten their role in the delivery of some investment guidance.
“It seems that Schwab is hard-selling having a cash position in the portfolio, which gives me pause since it has become clear that will make a not-insignificant portion of the expected revenue,” said James D. Osborne, a financial adviser and president of Bason Asset Management in Lakewood, Colo. “Most investors have meaningful cash allocations outside of their portfolios, in savings accounts, money markets or other liquid funds. I am not convinced, especially for more aggressive investors, that a cash allocation adds meaningful benefit to a diversified portfolio.”
Meanwhile, Liz Miller, president of Summit Place Financial Advisors in Summit, N.J., called smart beta a “fad.”...MORE
