Monte Carlo, Monaco, The brokerage firm Charles Schwab said on Monday that it would enter the online investment advice market early next year and would offer its advisory services to those customers without charge.
In the last few years, companies like Wealthfront, Betterment and FutureAdvisor have made a big splash building software that puts customers in a collection of low-cost exchange-traded funds.
For a fee of roughly 0.15 to 0.5 percent each year on the assets, the companies help people assess their risk tolerance, put them in an appropriate mix of these index-fundlike investments and rebalance back to the original allocation as the markets move. They also can help with optimizing sales to save money on taxes.
Schwab’s free offering will be called Schwab Intelligent Portfolios. Customers will need to invest a minimum of $5,000 and won’t get help with tax sale maneuvers unless they have at least $50,000 invested.
In a conference call with analysts, the company emphasized the availability of round-the-clock live help from licensed investment professionals, something start-ups have trouble offering.
When a service is free, consumers’ first instinct might be to look over their shoulders and check their wallets. In this offering, Schwab will make some money if its own exchange-traded funds are part of the investment portfolio and if other firms’ funds are as well, if those funds share revenue with the company.Schwab said it will have a team of people using a variety of selection criteria to decide which firms’ funds get into a customer’s portfolio and will not disqualify any funds simply because they don’t share revenue with Schwab.
“We will make the criteria transparent and public, and people will be able to draw their own judgment,” Walter W. Bettinger II, Schwab’s chief executive, said in an interview. The company will be acting as a fiduciary in this service, which means it is legally obligated to act in customers’ best interest.
“I would be skeptical,” said Jon Stein, founder and chief executive of Betterment. “I’ve never seen it happen before where a firm that has a vested interest in providing you with one product doesn’t somehow try to steer you towards that product.” Betterment said it does use some Schwab exchange-traded funds in its own portfolios when helping people engage in tax-optimization, but those funds are never Betterment’s first choice.
Mr. Bettinger said that his company’s service would be more sophisticated than those of the start-ups, adding classes of assets that might help improve performance. “The development and design is being done by a much more experienced group that already manages, on a discretionary basis, tens of billions of dollars,” he said.
Wealthfront and Betterment have investment committees staffed with Ph.D.s and experts on investing like the Princeton economist Burton Malkiel, the chief investment officer at Wealthfront. So customer choice may come down to price more than brainpower.
Branding may matter, too. Schwab, once the upstart that lowered stock-trading fees, is now the establishment firm with expensive storefronts trying to play catch-up.
Mr. Bettinger, however, said he saw the free services as consistent with the company’s roots under its founder, Charles R. Schwab, as a price-slashing discount brokerage firm.
“There will be a lot of comment and speculation and probably a lot of obfuscation and falseness put out, too,” he said. “What we’re doing here is no different than what Schwab was doing 40 years ago, when Chuck charged $70 for stock trades when everyone else was charging $400.”
Betterment said it had no plans to lower its management fees from its current range of 0.15 to 0.35 percent annually, pointing to the value that features like its new tax-impact preview tool provided. Wealthfront and FutureAdvisor also said they had no plans to lower fees. Mr. Stein of Betterment said he welcomed Schwab and all of the attention its marketing dollars would bring to the online investments field.
“I see this as further validation of concepts that we started working on five years ago,” he said.
