Schwab Bets That Investors Will ‘Binge’ on Advice With Netflix-like Subscription Service
If you’re a fan of bingeworthy shows like Stranger Things, Queer Eye, or Orange Is The New Black, then you’re familiar with how Netflix subscriptions work: A fixed monthly fee gets you access to an impressive universe of content.
In fact Netflix has been such a runaway success, that the investment industry is wondering: Will that kind of pricing model work for money management?
The answer could ride on how Charles Schwab & Co. fares with its pilot project, Schwab Intelligent Portfolios Premium. The San Francisco-based firm was the first brokerage giant to roll out a Netflix-like subscription model: A $300 initial planning session, plus a $30 monthly fee after that, gets you automated portfolio management via its roboadvisor platform, plus unlimited access to its network of financial planners.
“What drove our interest was the increasing prevalence of subscriptions in other industries,” says Tobin McDaniel, Schwab’s senior VP of digital advice and innovation. “People like the simpler approach, and feel it’s the right way to pay for services. It’s second nature to them.”
It’s part of a broader trend in the e-commerce world, what consulting firm McKinsey & Company called in a recent report the “subscription lifestyle.” Its survey found that 46% of consumers had subscriptions to streaming-media services, and that subscriptions are now extending into other areas as well, such as boxes of consumer goods.
The most likely consumers to subscribe, McKinsey found: Young urbanites with money. No wonder financial planners are salivating over the potential.
The subscription approach might not appeal to high-net-worth investors, who probably want more bespoke plans with highly personalized attention. But to a broader middle-class clientele—who might not have had a financial plan before, and are comfortable with the transparent pricing—it could be a good fit.
So how has the rollout been so far? Early numbers are promising: More than $1 billion in new assets under management, with a 25% increase in account opens, and a 37% rise in new-to-Schwab household enrollments, compared to its previous offering (which came with a .28% advisory fee).
As with any disruptive approach, subscriptions have generated fierce debate within the planner community. They goes up against more traditional pricing models that charge an annual percentage of client assets, such as 1%; and fee-only models, which charge purely for advice and stake no claim on assets.
Subscriptions are akin to a souped-up version of fee-only pricing, with a monthly price tag to ensure an ongoing relationship. While consumers seem receptive to the idea of monthly charge, planners are divided on whether this is the pricing model of the future.
“How good is your relationship with Netflix?” asks Patrick Huey, a financial planner in Camas, Washington. “Even if you are a raving fan, you probably don’t have one. A subscription isn’t a relationship, which is why I am not convinced that the model will stand the test of time." Additionally, “The number of subscribers needed to make it economically viable means that personalized service, coaching, education, and care, will necessarily suffer,” he predicts.
Others see subscriptions as here to stay, in particular as a way to bring more potential clients into the fold. Ideally, as those clients enter their prime earning years and their assets grow, they may be converted to other pricing models. Subscriptions may not be right for all clients—but they will be a fit for some.
“Subscription-based investing absolutely has a future,” says Joshua Nelson, a planner in Loveland, Colo. He says his firm used to have a $500,000 AUM (assets under management) minimum, but they were turning a lot of clients away. “It finally dawned on me that the client could just pay us directly, rather than it being pulled from their investment account. The result is that we are winning a lot more business from younger clients as they build up their wealth.”
The real vote of confidence for the subscription model, of course, will be if other major money managers follow suit. Investment giant Vanguard Group does offer a similar hybrid service, of automated allocation combined with a real-life planner, via its “Personal Advisor Services” offering that requires an account minimum of $50,000. But it has not yet gone the route of a monthly subscription, instead charging fees that begin at 30 basis points (tailored to account size).
“There has been less pushback than I might have anticipated,” says McDaniel, who happens to be a Netflix subscriber himself (his favorite show to binge on: Mindhunter). “A change in pricing always calls into question other pricing models," he says. "I would guess that other competitors will eventually try this, too."
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