The long-awaited Schwab ETF 401(k) platform was released this week following a delay as the firm dealt with intraday trading and fractional shares issues.
In the latest issue of NAPA Net the Magazine, Schwab CEO Walt Bettinger claimed that the power of ETFs has been emasculated because of record keeping technological limitations.
The goal of Schwab’s ETF program is not to offer low-cost investments. Rather, it is to shift costs from what it calls high-priced actively managed funds to personalized advice that Schwab offers through Guided Choice or Morningstar. With the cost of ETFs averaging 10 BPs and advice at 45 BPs, the combination mirrors the cost of actively managed funds.
Schwab’s Jim McCool announced the all-passive approach at 401kWire’s Influencers conference in 2011, which was followed by the launch of their all-index fund 401(k) platform in 2012. The ETF program is an extension of that service. Schwab claims that the cost of funds in the ETF program are 90% less than active funds and 30% less than index funds.
Most people need and want their investments to be managed by a professional, but the additional cost can hurt outcomes. So using low-cost building blocks makes sense. But does it make sense to eliminate all active management for all asset classes? And should advice come in the form of packaged products like TDFs, or from the customized managed investments that many large teams are now using, leveraging providers like BlackRock? For advisors, the question is: What’s the best role they can play? That role seems to be relatively small in Schwab’s new ETF offering, where the advice is delivered by online providers.
