Review of: Charles Schwab Intelligent Portfolios
Reviewed by: Larry Ludwig
Last modified: December 13, 2017
Charles Schwab Intelligent Portfolios is overall a decent robo advisor service offering a wide variety of its own in-house ETFs to choose from for your portfolio. However, in order to make the service free, we question its large cash allocation. This creates a drag on your returns.
Charles Schwab, the creator of the popular discount stock broker, originally rocked the investment world by offering stock trades at a fraction of what traditional brokers were charging. Competition is good.
Robo advisors, or as Schwab likes to call them — automated investing — services have become popular in the past few years. Firms like Betterment and Wealthfront, though still relatively small when it comes to 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 from which they can choose 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 are 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
|Tax Loss Harvesting||— All Taxable Accounts|
|Automatic Deposits||— Monthly and Bimonthly|
|Socially Responsible Investing|
|Access||Website, iOS App, Android App|
|Customer Service||Phone: 24/7; Live Chat: 24/7|
Opening An Account
As with 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 the account minimum of $5,000, and with Betterment, it’s available for any taxable account.
Charles Schwab Intelligent Portfolios Alternatives
|Fees||None||Digital – 0.25%/year; Premium – 0.40%/year||First $10k managed free; 0.25%/year for $10k+|
|Promotions||None||Up To 1 Year Free||$15k Managed for Free|
|Review||—||Read the Review||Read the Review|
Compared to Betterment and Wealthfront, Intelligent Portfolios offers a much more complex selection of ETFs. A maximum of 20 funds are used with the Intelligent Portfolios service. I’m not completely sure if you really need this complex 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 comes as no surprise that most of the ETFs are Schwab funds. The secondary ETFs, which in many cases are not their funds, might be used depending upon unspecified conditions.
The portfolio has a slight tilt toward 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 toward cash. Based upon testing, it’s anywhere from 6 to 30 percent 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 don’t 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 to 30 percent 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 it 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 the firm gets 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 it gives others a sort of legal method to “front-run” trades before they’re executed to get a cut in the bid/ask spread.
Pros and Cons
- Free Service — No direct fees to you beyond the annual fees for the ETFs within your portfolio.
- Tax-Loss Harvesting — Available for accounts larger than $50,000.
- Option to Remove Three ETFs — A unique feature in this space, you can remove up to three ETFs in the model portfolio they create for you.
- 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 we 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, using this service might make sense be seriously worth your consideration. However, you should understand the limitations and risks in the portfolio makeup.
This service, of course, is in direct competition with Betterment and Wealthfront. Though based on the review of Charles Schwab, we still recommend Betterment over the other two.
We feel Betterment’s asset allocation is slightly better, involves fewer moving parts and is overall easier to use for scheduled deposits.
We’ve done a cost analysis of the competing robo advisors. On paper, it appears as if Intelligent Portfolios is the cheapest, when in fact it’s not. If you include ETF fees and returns lost from the 6- to 30-percent cash allocation, at best their fees 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 this service an additional point, and it would be more on par with Betterment’s service.