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Established wealth management firms enter US Robo Advice arena

In March 2015, Charles Schwab launched Schwab Intelligent Portfolios, an online investment advisory service available to individuals who have a minimum of $5,000 to invest. Unlike many of its competitors, who commonly have either a flat fee model or apply tiered pricing based on the actual size of an individual’s portfolio, Schwab’s service has no advisory fees, no commissions and no account service fees. The only fees payable are the operating expenses on the exchange-traded funds (ETFs) within the portfolio.

Vanguard’s Personal Advisor Services, officially unveiled in May 2015, is a hybrid robo adviser. It is available to anyone who has at least $50,000 to invest and has an annual flat rate fee of 0.3% of assets under management.

Could either of these company’s robo-advice models meet the FCA’s suitability requirements here in the UK?

On a positive note, it would appear that Vanguards’ offering could. On the contrary, as we saw earlier with Betterment and WealthFront, Schwab’s Intelligent Portfolios service would not. We take a more in-depth look at both of these company’s robo-advice processes and procedures to discover the reasons why.

How Schwab’s Intelligent Portfolios Works

In the same way as the other robo-advisors that we have examined so far in this series, Schwab’s Intelligent Portfolios uses Modern Portfolio Theory (MPT) as the basis for developing personalised investment strategies.

To begin investing with Schwab, investors are asked 12 questions about their goals, investment time horizon and risk profile including:

When I hear “risk” related to my finances,

  • I worry I could be left with nothing
  • I understand that it’s an inherent part of the investing process
  • I see opportunity for great returns
  • I think of the thrill of investing


If I ever were to lose 20% or more of my investments in one year I would,

  • Sell everything
  • Sell some
  • Do nothing
  • Reallocate my investments
  • Buy more

Based on the individual’s responses, Schwab’s Intelligent Portfolios recommends a portfolio, using a complex mix of ETFs. Uniquely, investors can, if they so wish, opt to replace up to 3 of the suggested ETFs.

Goal Tracker

Schwab’s "Goal Tracker" tool is designed to help investors monitor their investment goals. By running a number of different scenarios, using estimates of the long-term expected investment returns, the tool can demonstrate whether investors are on target to meet their goal. If not, Goal Tracker can diagnose what investors need to consider changing in order to reach their future financial objectives.

For investors seeking to generate income from their investments, Goal Tracker can be used to set up a target monthly withdrawal amount. As any income withdrawal can potentially have a huge impact on an individual’s future finances, the tool can be used to monitor the withdrawals to ensure that the income stream will last as long as the investor needs it to.

How Vanguard’s Personal Advisor Services Works

Vanguard’s Personal Advisor Services offers a complete range of investment management and advisory tools to help investors develop an asset allocation strategy that meets their specific financial goals and personal circumstances.

To get started, investors consult with one of Vanguard’s financial advisers who, based on the individuals’ needs together with an analysis of their current investments and future income requirements, creates a customised financial plan and investment portfolio.

The financial advisers then continue to oversee each individual portfolio, reviewing it regularly and rebalancing it, when necessary, in order to ensure that it continues to meet the target asset allocation.

In summary

Although Schwab’s 12 question risk questionnaire attempts to identify a customer’s attitude to risk, much is missing from an advice process that would meet UK regulatory requirements. For example, there are no questions to establish a customer’s capacity for loss or the affordability of an investment - both key requirements for risk suitability assessment. Nor are customers’ debt levels or the existence of an adequate emergency fund explored. Ultimately, this means that this model would fail to comply with the FCA’s suitability requirements.

In contrast, since Vanguard’s Personal Advisor Services are provided by an actual financial adviser, it would appear to be a model which could work in a UK regulatory environment.

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