The threat to upstarts like Wealthfront is real. Schwab is off to a fast start, attracting more than a half billion dollars in assets in just three weeks; Vanguard’s service already is managing $10 billion.
With big players moving in, the potential pitfall is home cooking. This problem is at the crux of the criticism traditional brokerage firms face.
"On the one hand, you have unconflicted fiduciaries, from the independent RIAs to the "pure" robo-advisers, and on the other hand, you have brokerage firms in the business of manufacturing and distributing financial products and using 'advice' as a vehicle for selling product," says Michael Kitces, partner and director of research for Maryland-based Pinnacle Advisory Group.
That's not new, he notes. "It's just 'new' when the companies using advice to sell their proprietary products happen to be Vanguard and Schwab, companies we've traditionally put on the 'other side' of the self-interested-products line."
For investors, the biggest challenge is fee transparency. Wealthfront charges an advisory fee of 0.25 percent on accounts with more than $10,000 in assets, plus fees on Exchange-Traded Funds (ETFs) averaging 0.15 percent.
Schwab advertises Intelligent Portfolios as charging "no advisory fees." Yet a portion of investor's funds are invested in the company's proprietary "smart beta" ETFs, which carry higher fees than market-weighted funds. A Schwab spokesman says those fees actually are lower than Wealthfront’s total costs, ranging from 0.18 percent for a conservative portfolio to 0.26 percent for an aggressive portfolio.
One big caveat: Cash is the other way Schwab will make money. Customers will be required to hold 6 to 30 percent of their accounts in cash. It's not possible yet to gauge how much extra cost that will add.
And that's the key problem with home-cooked advisory services. Technology has opened the door to bring low-cost planning and investment advice to middle-market retirement savers. But if the entry of big-foot players moves the field away from transparent, independent advice and into selling, we will lose a great opportunity to offer a square deal to small retirement savers.