Charles Schwab is launching another robo advisor (SCHW)

MyPrivateBanking

See Also

The fintech ecosystem explained

Fintech could be bigger than ATMs, PayPal, and Bitcoin combined

THE FINTECH REPORT 2016: Financial industry trends and investment

This story was delivered to BI Intelligence “Fintech Briefing” subscribers. To learn more and subscribe, please click here.

Yet another robo advisor product from a legacy provider will hit the market, with Charles Schwab announcing on Tuesday that it plans to launch a second robo advisory service, Schwab Intelligent Advisory, in 2017, according to the Wall Street Journal.

The service will combine automated and human investment advice in a hybrid model, and Schwab employees and clients will begin testing the new product soon in pilot programs. The firm will continue to offer its fully-automated robo advisory service, Schwab Intelligent Portfolios, launched in 2015, alongside its new product.

The new robo advisory service will differ from Schwab’s existing robo advisor offering in several key ways:

• Human advisors are involved in portfolio selection. Consumers who want to sign up for the service must first answer some questions online. They’re then required to speak with a professional advisor either via telephone or video call for an hour to go over their financial plan. This will likely help reassure clients that the service is tailored to their specific needs, earning Schwab customer loyalty. This contact will also better position the firm to deal with ongoing fiduciary rule-related concerns as to whether it’s possible for a fully-automated robo advisor to act in a client’s best interests.
• Ongoing human advice. The new service will encourage annual portfolio reviews, but it will also allow investors to check in with human advisors on a more frequent basis if they wish to do so. In times of market volatility and political uncertainty, ongoing human contact and faster response times will reassure investors, helping to boost customer loyalty and satisfaction. Response times to queries are also an area where fully automated robo advisors often fall down.
• A higher minimum investment threshold. Schwab’s fully-automated service asks for a minimum investment of $5,000, while its new service has a higher threshold of $25,000. This higher minimum investment is likely due to the fact that a hybrid model has higher operating costs, thanks to the involvement of human advisors.
• It will charge fees. While Schwab’s initial service is free to use, the hybrid offering will charge advisory fees of 0.28%. These will be capped at $3,600 a year for clients with portfolios of $1.2 million or more. Again, this reflects the higher operating costs of a hybrid model as opposed to a fully-automated service.

Charles Schwab’s new service seems likely to help the firm attract more clients. Offering varying services will likely help Schwab appeal to a wider audience. Moreover, research shows that people prefer a hybrid model to a fully-automated service, and that they are even willing to pay more for it. Schwab Intelligent Advisory therefore seems likely to boost not only customer acquisition but also assets under management (AUM) for the firm.

Robo advisors are threatening to upend the enormous global wealth management industry in several ways, and they are likely to arrive in full force within the next few years.

Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on robo advising that looks at the market for robo advisory services, the drivers behind consumer adoption of robo advising, why the robo advisor market presents an opportunity to traditional wealth management firms, and how startup robo advisors can succeed as massive legacy companies begin offering their own services.

Here are some of the key takeaways from the report:

• Large incumbent wealth managers won’t lose out to startups like Betterment and Wealthfront. Instead, they are embracing the technology and launching their own products,which are scaling quickly.
• Consumers across all asset classes are receptive to robo advisors — including the wealthy. 49% of this group would consider investing some of their assets using a robo advisor.
• The majority of assets managed by robo advisors will come from people who already have some investments. We estimate that the volume of assets that comes from people who don’t currently invest will be less than 1% of the total by 2020.
• Startups are going to find it difficult to scale, and will need to differentiate their products to succeed. They are already doing this by providing white label services to wealth managers, and more customized stand alone solutions.