Charles Schwab officially announced today what has been coming for a while – they are rolling out an automated investment service for Registered Investment Advisors who custody client assets at Schwab. So that’s me. The service will feature automatic account rebalancing, tax loss harvesting (for accounts over $50,000) and almost complete customization for the advisor to build portfolios as s/he sees fit. The service is only ETF-compatible, so there’s no traditional mutual funds, including DFA, and advisors have to choose from a (fairly robust) list of ETFs eligible for the platform (including many Vanguard ETFs). For advisors with over $100 million at Schwab, there will be no cost to investors for the service.
I’ve gotten a handful of questions about whether or not I’ll jump in to using this, and for right now the answer is no. I think these services are great for investors getting started, certainly miles ahead of getting out of college and being sold a whole life policy from their freshman year RA, but they are still limited in scope.
Most of my clients are experienced investors who come to me with existing portfolios. We’re not often starting from scratch with cash, but re-positioning existing assets in the most efficient way possible. And any robo-advisor service is currently just not equipped to build a portfolio around existing positions.
Robo services are also not currently well equipped for more complex portfolios containing various pools of tax-deferred and after-tax assets. Asset location is an opportunity to make tax-sensitive investments, placing investments that generate higher levels of taxable income into a tax-deferred environment. Robo services don’t currently look across multiple portfolio accounts to make investments or to rebalance in the most tax-efficient way possible the way that existing RIA software does.
So for now, I’m an interested observer of the robo wars. I think that an army of Schwab custodied RIAs equipped with this technology and willing to work for less than 1% could put real pressure on newcomers Wealthfront and Betterment. We’re just in the early innings of this game and it will be a bit of a technology arms race. The software and algorithms will get better and limitations will be reduced. All of it will ultimately be good for investors.
Bason Asset Management 