Charles Schwab, the creator of the popular discount stock broker, originally rocked the investment world by offering stock trades at a fraction from what traditional brokers were charging. Competition is good.
Robo-advisors, or as Schwab likes to call it — automated investing — has become popular in the past few years. Firms like Betterment and Wealthfront, though still relatively small with assets under management, are becoming very popular.
The Charles Schwab Intelligent Portfolios robo-advisor service confirms the legitimacy of this space. The difference with Schwab is they have a large base of in-house ETFs in which they can choose from for their service. Although both Betterment and Wealthfront are broker/dealers, they are not self-clearing, nor do they have their own ETFs.
Both Betterment and Wealthfront use APEX as their clearing house. Vanguard and iShares is used for most of their ETFs. It’s been said these two firms are technology platforms, and to some degree I agree with that statement. Schwab has the upper hand since they do both of these services in-house.
Charles Schwab Intelligent Portfolios Features
|Accounts Available||Traditional IRA, Roth IRA, Rollover IRA, Trusts, Individual and Joint|
|Tax-Loss Harvesting||Yes — Taxable Accounts $50,000 or larger|
|Mobile App||Yes — Apple iOS and Google Android|
|Customer Service||Phone and Online Chat — 24/7|
Opening An Account
Similar to Wealthfront, to open an account you need at least $5,000 to deposit with Schwab. Schwab then goes through a 12-step questionnaire to determine your goals, time horizon, and risk profile. Each answered question adjusts the stock/bond ratio, and in the end out pops your specific asset allocation.
Investments are not FDIC insured, and Charles Schwab has SIPC insurance. Charles Schwab Intelligent Portfolios supports taxable and retirement accounts. Accounts with over $50,000 in taxable investments gain access to tax-loss harvesting. Wealthfront has tax-loss harvesting at their account minimum of $5,000, and with Betterment it’s available for any taxable account.
Compared to Betterment and Wealthfront, the amount and selection of ETFs are much more complex in the Intelligent Portfolios. A maximum of 20 funds are used with the Intelligent Portfolios service. I’m not completely sure about the need for this complex of a portfolio if you have less than $100,000 to invest. The target audience of robo advisors is typically the smaller investor.
Your portfolio makeup might or might not include all of the ETFs listed below. The secret sauce selection and mixture are based upon your answers to their 12-step questionnaire.
It is of no surprise that most of the ETFs are Schwab funds. The secondary ETFs, which are in many cases are not their funds, might be used depending upon unspecified conditions.
The portfolio has a slight tilt towards value with market-cap weighted ETFs, and a large percentage of small cap is within the portfolio when compared to the other robo advisors. One feature that caught me by surprise was the option to remove three of the ETFs listed in the portfolio they create for you.
Lastly, it should be said that the portfolio will always have a large percentage allocated towards cash. Based upon testing, anywhere from 6% to 30% of the total portfolio, and cannot be removed. This is a big negative aspect of their service, and over the long-term can be a significant drag on returns.
Although their marketing material states it’s to help smooth out returns, we question if there aren’t ulterior motives that help pay for the “free” service.
|Sector||Primary ETF||Secondary ETF|
|US Large Company Stocks||SCHX||VOO|
|US Large Company Stocks – Fundamental||FNDX||PRF|
|US Small Company Stocks||SCHA||VB|
|US Small Company Stocks – Fundamental||FNDA||PRFZ|
|Intl Developed Large Company Stocks||SCHF||VEA|
|Intl Developed Large Company Stocks – Fundamental||FNDF||PXF|
|Intl Developed Small-Cap Company Stocks||SCHC||VSS|
|Intl Developed Small-Cap Company Stocks – Fundamental||FNDC||PDN|
|Intl Emerging Markets Company Stocks||SCHE||IEMG|
|Intl Emerging Markets Company Stocks – Fundamental||FNDE||PXH|
|Sector||Primary ETF||Secondary ETF|
|US Treasury Bonds||SCHR||VGIT|
|US Corporate Bonds||ITR||VXIT|
|US Securitized Bonds||VMBS||MBB|
|Intl Developed Bonds||BNDX||IGOV|
|US Corporate High Yield Bonds||SHYG||JNK|
|International Emerging Bonds||EMLC||VWOB|
|Sector||Primary ETF||Secondary ETF|
|Gold / Precious Metals||IAU||GLTR|
How Does Schwab Make Money?
Since the Intelligent Portfolios is “free” how does Schwab make money? Actually from a variety of methods — none of which are too transparent. Like some of the other reviews I’ve seen for the Intelligent Portfolios, I too have an issue with this. Most individuals, especially in the robo-advisor space are typically novice investors and do not fully understand all of the underlying fees or potential loss of returns.
The first way is via the cash allocation you have in the portfolio. This can be 6-30% of your portfolio depending upon your risk profile. Schwab will then either use that cash to invest, or borrow out to others as a loan. For small portfolios (under $10,000) this drag on returns might not be so great, but can be significant with larger accounts.
The second way is via the ETFs selected. Each ETF has an annual fee which is automatically taken out and they get a cut — either directly since many ETFs are their own, or via relationships they’ve setup with the other investment houses. Granted, with the other robo advisors you also must pay this annual fee so the fees are around the same for each.
Lastly, Schwab will also earn money by selling trade orders to other firms. This isn’t illegal to do, but gives others a sort of legal method to “frontrun” trades before they are executed to get a cut in the bid/ask spread.
- No Fees — No direct fees to you outside of the annual fees for the ETFs within your portfolio. T
- Tax-Loss Harvesting — With an account of $50,000 or greater
- Option To Remove of Three ETFs — A unique feature in this space, you can remove up to three ETFs in the model portfolio they create for you.
- Automatic Rebalancing — The service will automatically rebalance your portfolio once it meets specific thresholds
- Most ETFs are Charles Schwab — Most of the ETFs used are Charles Schwab and good if you like your investing all inclusive.
- Large Cash Allocation — Anywhere from 6% - 30% of your investments will be in cash earning zero interest. Over the long-term the cash drag can significantly reduce your returns and question the ulterior motives.
- Large Tilt to Small Cap Stocks — A larger percentage compared to the competition is allocated toward small-cap stocks.
- No Fractional Shares — The investments will round down to the nearest whole share when investing.
If you are an existing Charles Schwab customer, then using this service might make sense to use and one to seriously consider. Though you should understand the limitations and risks in their portfolio makeup.
This service, of course, is in direct competition with Betterment and Wealthfront. Though based upon the review of Charles Schwab, we still recommend Betterment over the other two.
We feel Betterment’s asset allocation is slightly better, less moving parts, and overall the service is easier to use for scheduled deposits.
We’ve done a cost analysis of the competing robo-advisors. On paper it appears Intelligent Portfolios is the cheapest, when in fact it’s not. If you include ETF fees and returns lost from the 6-30% cash allocation their fees — at best are in line with competing robo-advisors and at worst they are the most expensive. I do wish Charles Schwab was slightly more transparent in the true costs of their “free” service.
If Schwab removed the cash option from the portfolio, we would increase the ranking of their service an additional 1/2 star and make more on par with Wealthfront’s service.