There’s a debate going on between Charles Schwab, who recently launched its Charles Schwab Intelligent Advisors service (robo-advisor), and robo-advisors, Wealthfront and Betterment about whether Charles Schwab’s robo-advisor service really is free. Because Charles Schwab wrote that it will recommend a 8-30% cash weighting for its clients depending on market conditions, Wealthfront and Betterment have gone on the offensive to point out that investing such a huge weighting in cash is not only costly in a hypothetical market return scenario, but irresponsible as well.
Charles Schwab can make money off its client’s cash by paying practically no interest, and reinvesting the cash in higher income producing investments. In other words, Charles Schwab can act like a bank, with a much lower funding cost. This may come as a surprise to many, but those who know how the finance industry works know it’s a simple spread business. The more money that can be cheaply procured, the more money can be deployed for hopefully higher profits.
It’s good that Wealthfront and Betterment have pointed out how Charles Schwab can actually make money from its free robo-advisory product. But here’s the thing, when was there ever a free lunch? Furthermore, although Wealthfront and Betterment keep their clients fully invested at all times, Betterment still charges a 0.15% – 0.35% fee and Wealthfront charges 0.25% on money after $10,000. There are also underlying ETF fees, averaging ~0.15%, which the client ultimately pays for their robo-advisors to build their portfolios.
Charles Schwab is charging 0.00% in fees for their robo-advisory service. Yes, if Charles Schwab also charged a 0.15% – 0.35% fee to manage money like Wealthfront and Betterment, while recommending 8%-30% cash, that would be odd. But Charles Schwab isn’t.
Let’s not debate which business model is better. Instead, let’s discuss whether cash can be considered an investment through a logical discussion.