Cash Not King In Robo Portfolios

March 12, 2015

This week, Schwab launched its long-awaited “Intelligent Portfolios,” aka the Schwab Robo Advisor. Everyone’s talking about the new service, especially because Schwab’s claiming it to be 100 percent free. Who doesn’t like free?


Adam Nash, chief executive officer of Wealthfront, the asset leader in the expanding robo space, is hopping mad. He’s out to prove Schwab’s service is actually expensive. Nash had a few choice words for Schwab, including “criminal,” “client-unfriendly” and “self-motivated.”


This is a messy catfight, because it touches directly on the conflict of interest between investors and their advisors. It all centers on Schwab’s use of cash, potentially up to 30 percent of their portfolios. Schwab Bank makes money on cash deposits, avoiding upfront robo fees while still generating plenty of robo revenue.


Schwab claims that cash acts as ballast, and helps deliver superior long-term risk-adjusted returns. Nash, whose firm now has more than $2 billion in assets, portrays cash as a drag on returns. As Arbiter

I get to play referee, targeting the long-term interest of investors. My verdict: Nash is right on cash, but for the wrong reasons. Every investor should hold some cash, just not in a robo advisor.


The Spat

Nash, Wealthfront’s CEO, sent a nastygram to Schwab. The accusation: putting Schwab’s interests ahead of its clients.’ Nash argued that Schwab’s inclusion of ultra-low-yielding cash will cost clients significantly, largely because risky assets offer better long-term returns.


Nash implied that Schwab was playing dirty pool, making its robo advisor look cheaper than the competition, while the opposite is actually more likely, since cash drag has a cost.


Schwab wasted no time in publishing a retort, emphasizing the virtues of cash as an asset class. Then it added fuel to the fire by tagging Wealthfront’s advisory fees as “sunk costs” that drag on investor returns.




Find your next ETF

Reset All