Once in a while we come across a certain trend or topic that we think is quite interesting and worth some notice but seems to get no attention in Canada. It happened a few months ago with the peg on the Swiss Franc being removed and it has seemed to happen again with Charles Schwab and Wealthfront trading jabs with regards to their respective robo-advisor businesses. These are topics that are getting fairly significant attention on the US side of things but have not seemed to even get a mention in Canada. A short disclaimer, I did cut my cable a while back (thanks Netflix) so this news could be all over the TV and I could be none-the-wiser. Regardless, it is too bad because this recent battle is interesting, amusing and even a little disheartening.

We will be providing some links on this story in this Fridays Five from 5i so we won’t bother rehashing what other people have said but we will summarize things quickly:

• The Wealthfront CEO released a piece criticizing the Charles Schwab robo-advisor business, the companys use of cash allocations, and the use of smart-beta.
• Charles Schwab did a press release questioning motives and some of the conclusions made by Wealthfront. Both articles (linked above) are interesting and worth a read.
• Wealthfront is a classic robo-advisor offering ETF portfolio management for a low management fee plus the regular ETF fees.
• Charles Schwab released a competing product that charges no management fee, just a fee on ETFs which would predominantly be Schwab funds.

One can understand why a company like Wealthfront may lash out against this move by Schwab, as it could very quickly start to hurt the business of Wealthfront and similar offerings. Schwab has a much larger distribution network and has the advantage since they run the actual ETFs being sold. This means that they would likely be willing to take a hit on a general management fee at any time, if it means more assets being allocated to Schwab funds (and in turn charging the MER). This ‘synergy’ is pretty tough to compete with. Not to mention, it also provides a great Trojan horse for Schwab through the generation of sales leads to higher margin advisory relationships.

Most seem to agree that the exchange between Schwab and Wealthfront is a little disappointing as the two companies are squabbling over what is still a fairly small ‘pie’. It seems silly to start fighting with each other over the small piece of pie when they could work together to increase knowledge and awareness of this type of product. Both companies could then eat from a bigger pie. Not to mention, they are arguing over very small percentages in savings compared to mutual funds, which are renowned for charging too much while underperforming and should be the real target of these businesses when talking about fees. This move by the Wealthfront CEO leads me to think that they are really scared of what Schwab is doing and maybe they should be. However, what is more interesting to us, is that this seems to be a non-story in Canada even though it can very easily be extended across the border.

There have been a few interesting robo-advisor options popping up in Canada over the last year or two and they look like they are making a splash. It makes perfect sense, as they address a market that is underserved, specifically those in the accumulation stage that need some help but do not have enough assets yet to be of interest to most advisors. Some of the robo-advisors even offer a ‘light-advisor’ type of service to help clients along in the process. The development at Schwab, however, has to have the Canadian counterparts a little concerned because there is no way that not one of the big Canadian banks are considering a similar model as Charles Schwab. It simply makes too much sense and is too easy:

• Step 1: Create a robo-advisor/allocation type of service (admittedly more complex than this line denotes)
• Step 2: Waive a management fee and sell in-house funds to clients, earning the MER on in-house funds
• Step 3: As client assets grow, convince them to flip over to an advisory relationship
• Step 4: Profit 

We think this is a development to watch and are still a little surprised that the story does not seem to have legs in Canada, given the promising and growing robo-advisor options in the North. We would not be surprised if the big banks were considering these options but there are ways to defend against this type of threat through illuminating concerns of conflicts-of-interest with bank robo-offerings (banks selling bank products only) and providing some flexibility or a personal touch that a large institution just may never be able to offer. Regardless of how this story unfolds, if it is happening currently in the US, we do not think similar developments are far behind in Canada.