The Charles Schwab Corporation (SCHW) is a retail brokerage and banking giant that oversees $2.25 trillion in client assets as of the end of 2013. On Monday, Schwab announced the launch of its new Schwab Intelligent Portfolios™. The new product will be available to retail investors beginning the first quarter of 2015 and soon after that to Registered Investment Advisors.
Schwab’s intelligent portfolio (“Robo-Advisor”) is a complex algorithm that adjusts a portfolio’s asset class based on inputs of the user. Robo-Advisor uses low-cost exchange-traded funds in twenty different asset classes.
Robo-Advisor automatically rebalances the portfolio for the user based on investment strategy, accepts automatic, periodic funding and offers live help assistance from an investment professional, if desired.
The best part is that there’s no advisory fee, trading fees or account service fees. With the difference between having market beating returns and sub-par performance very frequently coming down to fees, this is a breath of fresh air for many small investors.
Is Robo-Advisor a game changer for the industry? Hardly. Several competitors already have similar products … but with up to 90% of a portfolio’s return attributable to asset allocation and not active management, any product that can cost-effectively manage a diversified portfolio is a good for investors.
Will Robo-Advisor Be a Home Run for Schwab?
Schwab’s Robo-Advisor will help the company make inroads into a growing segment of the investing public that needs the help and is fee sensitive … but I doubt it will have any impact on Schwab’s near-term earnings. Schwab’s is targeting the Robo-Advisor service to a younger crowd that prefers a cheaper, more technology-driven approach to money management.
In addition, although competitors already have similar products, Schwab’s marketing prowess and its ability to offer better customer service with a breadth of products that is virtually unmatched in the industry. Customers of Robo-Advisor may eventually be willing to dip their toe into other services offered by Schwab as well.
Of course, nothing comes without risk, and Robo-Advisor may cannibalize Schwab’s current client roster. But with many other competitors already offering similar services, Robo-Advisor will more likely attract new assets away from competitors than away from Schwab’s current client stable.
Schwab’s 12-month consensus stock price is $31.5, a decent premium to current market levels, but with a price-to-earnings ratio of 28.7 (vs. 18.7 for the S&P 500) and a price-to-earnings-growth ratio of 1.5, Schwab is certainly not a value play and its new Robo-Advisor product does not change my opinion of that.
Schwab is best for investors interested in a momentum stock that has performed well over the past year, who also believe trading volumes will increase through 2015 and interest rates are headed higher, which will boost Schwab’s net interest income. The margin of safety at current prices is too thin for me as a value investor to consider, but I may reevaluate on pullbacks, as Schwab offers a track record of profitability and good financial strength.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
