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Matt Levine

Schwab’s Robo-Adviser Hid Some Fees

Also banker chats, ESG, insider trading, M&A and Musk.

In 2015, Charles Schwab Corp. launched a robo-adviser service called Schwab Intelligent Portfolios. SIP would would invest customers’ money for them in a mix of funds optimized for their risk appetite, investment horizon and tax situation. Unlike competing robo-advisers, SIP would not charge customers a fee for this service. Instead, it would allocate a bizarrely large portion of their portfolios to cash, and it would keep the cash in a Schwab-affiliated bank account paying (initially) 0.1% interest. Schwab could use this cash to earn a higher rate and keep the difference, making this product profitable for Schwab. Other robo-advisers did not allocate so much to cash, because they are investing products; most customers keep their cash in bank accounts and want their investments to be invested. But the other robo-advisers charged fees.

Schwab’s approach was good marketing, but bad for investors: You’d rather be 100% in the market while this was going on (2015 through 2018) and pay a fee than be 80% in the market and 20% in cash earning nothing. It was also sort of weirdly well-known: I remember it being controversial at the time, and here is a good New York Times article by Tara Siegel Bernard from March 2015, when SIP launched, headlined “Schwab’s Service for Investors Seeking Thrifty Advice Raises Eyebrows” and laying out the problem clearly. But Schwab was cagey about it, saying that actually those cash allocations were intended to be good for customers rather than just to make a buck.