Tag Archives: cullen-roche

Did Schwab Just Kill The Non-Human Robo Advisor Services?

Bonds, dividend investing, ETF investing, currencies “}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); Charles Schwab (NYSE: SCHW ) launched a new service recently called Schwab Institutional Intelligent Portfolios. The service is a fully customizable automated portfolio management product that will give every advisor on their platform the same tools and options that the other Robo Advisory services have (automated rebalancing, tax loss harvesting, etc). In other words, it’s given every human advisor the option to copy what the Robo Advisors are doing while COMBINING fully customized portfolios and other advisory services. Schwab is really ahead of the curve here. In essence: Schwab is already offering a free Robo service which means that anyone using a competing Robo is basically paying fees for no reason (unless you’re a small account below the free minimum). Schwab’s Institutional offering is fully customizable which means that you don’t have to be restricted to the cookie cutter Modern Portfolio Theory style portfolios that most of the Robos currently offer. Schwab’s Institutional offering combines humans with automation which means that you don’t have to worry about poor risk profiling and having your existence reduced down to a number based on a 5 question profile form. This is a big trend change. Every human advisor can now offer Robo Advisory services. And advisors with low fees can offer the same services combined with the human touch. This, in my opinion, is the best of all worlds. And it will force the other Robos to change their offerings. My guess is we’ll see a few big trend changes from the other Robos if they want to compete: They have to combine humans into their offerings. Schwab’s new service is simply too competitive. A reasonable advisory fee combined with the Robo automation makes the Schwab offering a no-brainer if you’re looking for automated portfolio services. The purely automated services tried to differentiate themselves by removing the human advisor, but you can’t be a real “advisor” and remove the human element. Robo “Advisor” was always a misnomer because of this. Schwab has completely fixed this problem. The other Robos will need to create their own ETFs. Schwab has checkmated the other Robos who don’t have their own ETFs because they are forced to charge higher fees. That is, they have to charge you a management fee AND they have to charge you the ETF expense ratios. Since Schwab uses their own ETFs they can make money on their free Robo service without charging you a management fee. We should start seeing some consolidation in this space. The smaller robos can’t compete with Schwab because they’re not banks and they don’t have their own ETFs. This means Schwab is able to use their cash sweep program to boost profits AND they can charge fees on their underlying ETFs. The other Robos don’t have this same degree of flexibility because most of them aren’t banks with their own ETFs. In order to compete the other Robos have to expand their operations and the easiest way to do that is to either gobble up other firms or hope to get gobbled up. The fully customizable portfolios that the Schwab Institutional platform allows for means that the “passive” trend in Robo portfolio management is dead. The other services will have to start offering full discretion in their portfolios at some point. My guess is we’ll start seeing “active” management with Robo services embedded. I have to say that I am still not sold on this sort of automated portfolio management. As I’ve discussed on many occasions (see here and here ) I think that portfolio management should be personalized and requires some discretion. So, Schwab hasn’t totally changed the game here. But I have to admit that I am pretty impressed with how far ahead of the curve they are here. For a firm that hasn’t generally been known for their tech savvy they seem to be beating Silicon Valley at their own game. Share this article with a colleague

The Super ‘Short-Term’ Epidemic

Bonds, dividend investing, ETF investing, currencies “}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); In a recent post I talked about the intertemporal conundrum, the problem of time in a portfolio. That is, we live in a dynamic world where our financial lives aren’t necessarily one clean “long-term” . Because of this we often obsess over the short-term and end up doing detrimental short-term actions in what is essentially a failed attempt to create certainty in an uncertain financial world. It isn’t totally irrational to think about the short-term, however, this article from Fund Reference shows just how bad the problem is. Here are just two examples of how bad the current state of affairs is: That is even worse than I would have expected. For every person who is thinking about the “long-term” there are almost 20 who are thinking about the “short-term”. And the chart on expenses relative to performance shows that we’re basically just chasing performance and downplaying the importance of fees. Yet the data shows this is precisely the wrong way to think about the financial markets. Yes, we’re all active investors . But the smart active investors maximize efficiencies by reducing portfolio frictions like taxes and fees while maintaining a realistic perspective of your investing time horizon. The obsession with the super short-term is almost certainly detrimental to your wealth. Share this article with a colleague

The Big Lesson From A Bet With Warren Buffett

Seven years ago Ted Seides made a bet with Warren Buffett that a fund of hedge funds could outperform the S&P 500 over a ten-year period. As of today, that bet is looking very bad, with the S&P 500 beating the fund of funds by over 40% (63.5% vs. 19.6%). Seides wrote a piece for CFA Institute explaining why the bet has been wrong and some lessons from it. While Seides makes many good points, there’s one lesson that is particularly important in all of this: Seides explains that half of the underperformance is from fees: Just over half (24.4% ÷ 43.9% = 55.6%) of the underperformance by hedge funds can be attributed to fees. A full 19.5% of cumulative underperformance, or approximately 2.6% per annum, must have been caused by something else. That’s not exactly a glowing endorsement for high fee funds. Why would anyone pay more for less? The fact is, the investment world has become dirt cheap. You can get good financial advice for a fraction of the fee that you once had to pay. The entire hedge fund industry is living in the past, hoping to continue to suck 2&20 out of their unwitting clients for as long as they can. The reality is that you don’t have to pay high fees for smart advice any longer. Heck, I offer my asset management service for a measly 0.35% and I’d say I am a pretty “sophisticated” thinker. That’s what my mother tells me anyhow and I believe everything she says. More importantly, we’re entering a world where future returns are likely to be lower in the future. With bonds generating low yields, a balanced portfolio is either going to produce lower returns in the future or higher volatility returns as more of the gain is made up by stocks. This creates a problem for investors. If you’re paying high fees, you’re either paying more for lower risk adjusted returns OR your fees are eating into your returns by an increasingly large margin. If you’re looking at a real return (after inflation) of 6%-7% in stocks, then we have every reason to be mindful of any other frictions like taxes and fees that might reduce that return even further. But what is the average fee effect? To put things in perspective, consider that the average mutual fund charges 0.9% relative to the average low fee index which charges 0.1%. That’s a 0.8% difference. It doesn’t sound like much, but take a 7% compound annual growth rate on $100,000 and extend that over 30 years. Just how much of an impact does it make? The mutual fund ends up with a balance that is 23% lower than the index. In other words, the mutual fund could just mimic the return of the index and reduce your return by $150,000! Either way, the solution is simple. Stop paying high fees. My general rule of thumb is that you should almost never pay more than 0.5% for portfolio management. If you’re paying more than that, then I highly doubt you’re getting your money’s worth. Are you Bullish or Bearish on ? Bullish Bearish Neutral Results for ( ) Thanks for sharing your thoughts. Submit & View Results Skip to results » Share this article with a colleague