Windhaven Portfolios: Is Schwab just blowing hot air?

Dear Mr. Market:

The investment industry is notorious for not being transparent with investors.  The industry tends to be a shade of grey as opposed to being black and white. There are often hidden agendas or conflicts of interest that the average investor is never aware of or informed about.  Think back to some of the situations that have negatively impacted investors in just the last few years: Bernie Madoff, Insider Trading, the Mortgage Industry debacle and the meltdown of Enron!  Conflict of interest is essentially why the Sarbanes-Oxley Act is now in existence.

Conflict of InterestOccurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation. (from Wikipedia).

WindhavenToday we will take a look at an investment firm that has had incredible growth over the last several years: Windhaven Investments.

schwabIn 2010 Charles Schwab & Company (SCHW) purchased a small investment advisory firm in Boston named Winward Investments.  The firm’s strategies had posted impressive results for several years and didn’t use the industry standard ‘buy and hold’ type of approach.  They used primarily ETF’s (Exchange Traded Funds) and claim to invest in over 40 different sectors, participating in positive markets and protecting in downturns.  Schwab paid a hefty price for the firm, paying $150 million in cash and stock (source: WSJ).

At the time Schwab executives said they expected the acquisition to add “modestly” to their bottom line in the first 12 months following the deal.  After acquiring the company Schwab changed the name of the firm to Windhaven Investments and quickly added it to the investment solutions they present to clients.  Walt Bettinger, Schwab President and CEO, was quoted as saying, “Their long-term track record of portfolio construction which has balanced risk management with market out-performance through global diversification is a tangible testament to the power of their approach and will be a great addition to Schwab’s investment management solutions.”  At the time of the acquisition the firm managed approximately $3.9 billion in ETF (Exchange Traded Funds) based strategies.  At the end of 2013 Windhaven Investments had over $17 billion in investments!

Let’s take a step back and put those numbers into perspective… over 3 years (2011, 2012 & 2013) Windhaven Investment has grown nearly $14 billion or approximately $4.3 billion dollars per year!  If you crunch the numbers the assets under management doubled each year over this short time frame.  While the market has done very well for investors this kind of growth is remarkable!

If we pull back the curtains however, the actual performance of the funds doesn’t even come close to explaining the real reason for this rapid growth.  Below are the performance results released from Schwab comparing them to a similar allocations:

Through 9/30/13

1 Year

3 Year

5 Year

Windhaven Diversified Aggressive




S&P 500








Windhaven Diversified Growth












Windhaven Diversified Conservative








According to their website, “Windhaven Investment Management, Inc. is characterized by a proactive approach that seeks to capture growth in rising markets while attempting to reduce exposure in declining ones.”  The numbers in the chart above paint a very different picture.  Since being acquired by Schwab the investment strategies have drastically underperformed the market on a consistent basis. With performance results that don’t even come close to explaining the rapid growth in assets, the obvious question is what is driving this growth?

Schwab has offices and call centers positioned throughout the United States; essentially they have built a huge selling machine with over 13,000 employees.   The financial services industry has realized for years that if you incentivize a sales force that sales will quickly follow.   Performance and anemic track records can often be overcome with cold hard cash.  According to Schwab they pay their Financial Consultants through two components: Service Pay and Solution Pay.

  • Service Pay – “Compensates a Financial Consultant for building and maintaining relationships with clients in their practice. Each month, they are paid a percentage of the approximate annual revenue attributed to clients in their practice.”  Source: Schwab
  • Solution Pay – “Compensates a Financial Consultant for helping deepen relationships with our clients and for matching client needs with appropriate products. Financial Consultants receive a one-time payment each time clients with whom they work—both in and outside of their practice—bring Net New Assets to Schwab and enroll in certain products and services.” Source: Schwab

While this all looks fair and equitable the ultimate factor is how do the numbers actually add up and are Schwab employees incentivized to recommend certain products over others?  Like the majority of investment firms Schwab attempts to position themselves as the provider of an ‘investment marketplace’ to investors.  What they do NOT share however, is that their employees are incentivized with higher payouts to encourage clients and prospects to move their money into investment options that Schwab owns! This is like going into a Fidelity Investments office and only buying Fidelity mutual funds when there are other options that are performing better at lower expenses!

Keep in mind that Windhaven Investments appears to be a separate firm but in reality it is owned by Charles Schwab & Company.  According to Schwab they pay their investment professionals anywhere from 7% to 9% for assets that are invested in any of the three Windhaven Strategies.  The fee to the investor ranges from .95% to .70% based on the amount of assets invested.  They have a minimum investment of $100,000 for taxable and retirement accounts and $25,000 for eligible ERISA accounts (i.e. 401 (k) & 403 (b) plans).   Based on the year-end total of $17 billion in assets, Schwab is generating well over $100 million in fees (based on average fee of .83) and then pay their sales force under 10% of that total.  Based on a purchase price of $150 million Windhaven Investments is a cash cow for the company!

Windhaven Investments and Charles Schwab are just one example of what commonly takes place in the investment industry.  Investors often think they are diversifying their assets and using multiple advisors when in reality their portfolio is with only one firm.   While the information is available not many investors take the time to dig in and truly understand what they are investing in.  It is vital that investors understand how their investment professional is paid and why they are making certain recommendations or referring to “pre-screened” advisors.  We’ve discussed the different forms of investment professionals before ; if you need a refresher we would encourage you to read this article. The best way to know that your professional is truly working for YOU and your best interests is by working with a Registered Investment Advisor (RIA).  Due to their Fiduciary Responsibility they work in the best interest of each individual client and not to support the bottom line of a Fortune 500 company. Do you want an advisor that is putting wind in your sails or towards that of another boat?

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