Charles Schwab And Rise Of Robo-Advisors

Several years ago, the idea of computer software managing and selecting the optimum investments for an individual’s retirement account, was not heard of.  Today, there are numerous “robo-advisor” options out there that rely on computer algorithms and software to help manage portfolios more efficiently.  Betterment is one such online company that offers robo-advisor services, but the real surprise and catalyst for this emerging concept is the fact that the big brokerages are now showing interest in the robo-advisor concept.  The Charles Schwab Corporation (SCHW) has released a feature known as the Schwab Intelligent Portfolio (SIP).  The Schwab Intelligent Portfolio is Schwab’s proprietary answer to robo-banking and advising.

Screenshot_302 Screenshot_301 Screenshot_300 Screenshot_299 Screenshot_298 Screenshot_297 Screenshot_296

How will SIP help Charles Schwab’s bottom line?

Analysts at RBC Capital Markets estimate that the robo-advisor industry could eventually be a $500 billion new market.  Not only does this show significant growth possibilities with the concept as a whole, but Charles Schwab’s early entry into the new market could help them solidify a top position in the market down the road.  RBC Capital Markets does estimate that Schwab Intelligent Portfolios could add an additional $0.22 to earnings per share.  Additionally, RBC Capital Markets analysts are very confident that Schwab will have more success at the robo-advisor options because it is creating the new platform to serve the average investor.  Vanguard is building a robo-advising service, but has a $100,000 minimum an a 30 bps advisement fee.  This steep cost to entry will give Charles Schwab the upper hand in the new industry.

How Warren Buffett Uses Discount Rates To Value Stocks

Berkshire Hathaway Warren BuffettWarren Buffett has never detailed the process he uses to value the businesses he acquires for Berkshire Hathaway. However, over the years, he has provided some limited insight into his methods. Q3 2020 hedge fund letters, conferences and more Based on these comments, it is widely assumed that Buffett uses a discount cash flow model Read More

Charles Schwab Robo-Advisors

Charles Schwab’s growth outside of robo-adviser services

Charles Schwab has a lot more to offer than the SIP program.  The brokerage’s proprietary, low cost ETFs are very popular among average investors.  RBC Capital Markets analysts say that the SIP program will feature 13 Schwab-branded funds, giving the brokerage yet another revenue avenue.  Additionally, the analysts noted that as much as 12% of an individual’s portfolio may be required to be held in cash.  The cash then sits in Schwab Bank, where the broker is able to generate spread earnings on the cash.  Analysts believe these spread earnings transactions, alone, could bring in an additional $0.10 per share for earnings.

Overall, Schwab is very well positioned in the robo-advisor industry.  Not only will Charles Schwab’s low cost and effective platform appeal to the everyday investor, but the company has positioned the robo-advising around other aspects of its business, to help generate more revenue.  Schwab ETFs are likely to get a boost from SIP push, which in turn, helps Charles Schwab gain further.  Overall, RBC Capital Markets is bullish Schwab with a price target of $38.00 and it certainly makes sense from a bullish standpoint.

Disclosure: None