The investment business is fiercely competitive, with the degree of competitiveness typically masked by surface bonhomie in public. Industry leaders mingle at many events, often sharing a stage together without generating fireworks or controversy. The historical context of polite competition makes bold statements by Betterment and recent public jousting in back and forth blog posts by Wealthfront's Adam Nash and representatives of Charles Schwab particularly noteworthy.
The exchange of blog posts had more in common with "trash talk" from Seattle Seahawks' player Richard Sherman than with most commentary published by financial services companies. The tense back and forth in public is a rare public display of open conflict, but tellingly reflects sentiments similar to what I've heard in private from many industry participants in recent months.
Comparing Spin and Reality
One of my business school professors, "Professor S.," had a favorite saying: "You can paint stripes on a rabbit, but you can't make it roar," which was intended to encourage students to challenge posturing and "spin" often seen in the corporate world. We're going to invoke the spirit of Professor S. to evaluate claims by leading entrants in the robo race:
Betterment: "We're profitable on a per customer basis"
- Professor S.: "By what metric? Probably not under generally accepted accounting principles given assets under management that imply revenues of less than $10 million a year, and a cost structure that includes staff (reportedly nearing 100 employees), office space and advertising. Even with the most generous estimates of revenue, annual costs must be a multiple of the firm's current revenue.
Betterment: "Betterment customers can expect 4.3% higher returns than the typical DIY investor"
- Professor S.: "This is my favorite eyebrow-raising kind of claim, one that's based on simulations conducted under the most favorable of conditions. I'd like to see the actual results from the inception of their program receive the same prominence on the website as the simulated results.
Schwab Intelligent Portfolios: "Schwab Intelligent Portfolios charges no advisory fees, no commissions and no account service fees"
- Professor S.: I love a free service, but is this truly free? Schwab and its shareholders will expect to make a profit, so it's reasonable to look into how that profit will be made In this case, although Schwab isn't charging an explicit fee for the service, they will profit through indirect mechanisms such as spreads on cash balances maintained at Schwab Bank, ETF platform fees, management fees for Schwab ETFs included in the program and payments for order routing. This is the classic example of the co-dependent relationship between consumers and financial institutions, in which consumers embrace a service with low explicit costs while paying potentially high implicit costs.
Adam Nash, CEO of Wealthfront: "Charles Schwab has become Merrill Lynch"
