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The Second Mouse Gets the Cheese

Schwab’s foray into the robo-adviser market last week appears to have shaken up the pure play technology firms already occupying the space. In our view, these tech upstart First Movers have reason to be concerned.

The so-called First Mover Advantage is traditionally based on three things: technological leadership, preemption of scarce assets, and the high cost of switching. Unfortunately, the current robo-adviser leaders do not have the upper hand in any of these categories.

First, the technology behind Schwab’s “Intelligent Portfolios” appears to be on a par with technology found at the leading robo-advisers. At the very least it’s unlikely that the market will be able to measure any material disadvantage in the Schwab offering.
Next, there are no real assets involved in production to be scarce nor have the robo-advisers cornered any particular market segment to the point where their dominance might impede competitors’ growth.
Finally, late entrants need not win market share from current robo-advisers to be successful. Despite reported strong asset growth rates, robo-advisers’ client bases are still relatively small. This means there really are no added costs to get prospects to switch providers.

And Schwab, as a second-mover, has some significant advantages. The firm has a well-known national brand, a huge built-in client base of self-directed investors and an impressive war chest to allocate to marketing promotion and product development. It may even have produced a more appealing robo product given its lower cost and ease of use.

It will certainly be interesting see how this marketing battle plays out. But, right now it looks like it may be a replay of First Mover, books.com vs. Second Mover, Amazon. com.