Charles Schwab is about to roll out a new service, the robo-broker,  they hope will be a small step towards the future of financial advising.  The brokerage firm plans to introduce a service that will automate investing for novice investors who either do not have enough money to warrant a human broker or do not require the services of a human broker.  Charles Schwab is developing this service in-house much to the chagrin of the numerous startup firms that are offering the same service.  They plan to eventually charge management fees of 0.15% to 0.35% of the client’s total assets.  This is much less than the 1% to 3% that human brokers charge.

Charles Schwab sees this as a way to try and capture some of the business of up and coming millennial investors.  They hope that as the younger investors grow in age and in wealth, they will stick with Charles Schwab.  The firm hopes this will be an effective way to replacing the aging, but affluent, Baby Boomers who compose the large majority of the firm’s current customers.

The service creates a tailored investing plan for each customer after the customer fills out a questionnaire.  The questions allow the robo-broker to determine an individual customer’s investment goals and risk tolerances. The service will use an algorithm to place the customer into specific portfolios or other assets that match the profile created by the algorithm.

Human brokers that have been interviewed about the robo-brokers say they do not feel threatened by the advance in technology.  They contend that the more sophisticated offerings, strategies, and services they provide to wealthy clients will always require a human touch.

The service, which will debut this month, may be introduced as a free service initially to generate interest in the next gen product.  The service is also expected to include automated portfolio rebalancing and tax-loss harvesting.  Adam Nash, chief executive of Wealthfront, Inc., the largest robo-broker with more than $1.4 billion of client assets commented, “Schwab definitely has a track record of entering a market by underpricing or pricing low, but I don’t think it has a proven way to dominate markets.”  Several other robo-broker firms have said they do not plan to match the offer of free services as they believe they already offer great value compared to the coming Charles Schwab service.

The service does present some legal issues that may present some challenges for Charles Schwab relative to other firms that offer only robo-broker services.  Charles Schwab would have the ability to have the customer’s profile reviewed by an actual broker, who they employ, unlike the robo-broker only firms.  This could potentially lead to questions about the suitability of the investments that customers are placed into.  There is also the question of whether the customer will understand the questions asked of them to the extent necessary to put them in the type of portfolio or risk tolerance level they were looking for.  These are issues that are still best confronted by the human broker who can, and should, ensure that their customer is placed in suitable investments and that the customer has an understanding of the types of investments their money is being placed in.

To learn more about Richard Frankowski, visit The Frankowski Firm.