- Review: TD Ameritrade Essential Portfolios
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With TD Ameritrade's robo-advisor, you can take advantage of having at least some of your portfolio professionally managed while you maintain other self-directed investments. The advisory fee is reasonable, and the company offers local branches as a point of contact. However, Essential Portfolios does not provide a tax-loss harvesting function.
Many of the large investment brokerages have been rolling out their own robo-advisor platforms, and TD Ameritrade did exactly that late in 2016. It’s called Essential Portfolios because it’s comprised of several portfolios — five, actually — that give you a choice as to the specific level of risk you want to take on.
What Is TD Ameritrade Essential Portfolios?
The Essential Portfolios robo-advisor is managed by Amerivest Investment Management, a registered investment advisor affiliate of TD Ameritrade. The investments used in each of the five portfolios are ETFs that are recommended by Morningstar Investment Management.
The five portfolios offered include:
- Moderate Growth
The ETFs are arranged in each of the five portfolios consistent with the risk level of each. Once the portfolios are established, all investment activity in your account is handled by TD Ameritrade, including periodic rebalancing of your portfolio. Essential Portfolios functions as a totally hands-off investment platform for you.
TD Ameritrade Essential Portfolios Features
|Account Fees||0.30% per year|
|Accounts Available||Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, SIMPLE IRA, Trust, UTMA/UGMA, 529, Coverdell ESA, Individual and Joint|
|Portfolio Rebalancing||Yes — Rebalancing is done by investment managers on a nondeterministic basis|
|Mobile App||Yes — Integrated into existing iOS and Android apps|
|Customer Service||Phone — 24/7; Live Chat — 24/7; 100+ Local Branches|
How Does TD Ameritrade Essential Portfolios Work?
As is typical with robo-advisors, you first have to determine your risk tolerance as well as your future goals in order to choose the portfolios you will invest in. That means you start by completing a short questionnaire when you fill out your application.
The questionnaire poses questions that are related to your investment goals, which include specific investment purposes as well as expected timelines. Risk tolerance questions are oriented toward determining where you fit on the scale between conservative and aggressive.
Once that is determined, your money will be invested in one of the five portfolios that are commensurate with those goals and risk tolerance. The portfolio will be comprised of a group of low-cost exchange traded funds (ETFs) that are designed to capture the total investment market but in measures that are consistent with the indicated risk level.
TD Ameritrade Essential Portfolios Features
TD Ameritrade Essential Portfolios Easy Signup Process
The application for TD Ameritrade’s Essential Portfolios is a simple multi-page online process, but it warrants a discussion all its own. The application starts by asking if you want to invest for retirement, for wealth generation, for education purposes, or for either one-time or recurring expenses, such as travel or the purchase of a house.
It then requests the following:
- Date of birth
- Age you expect to realize your investment goal (retirement, investment worth, etc.)
- How much your initial investment will be and how much you plan to contribute to this portfolio each month
- Your current liquid net worth (presumably to determine other asset holdings)
- How many months of income you have in savings
- If you expect to make any withdrawals before reaching your investment goal.
Next it asks you to determine your risk tolerance. One of the things I found to be curious with the questionnaire is that, rather than asking a series of questions designed to determine your risk tolerance, it instead asks you to make a self-determination. It does this by asking you to rate your own risk tolerance: Lower, Fairly Low, Medium, Fairly High or Higher.
I’m not certain making that determination is really that simple. For example, it doesn’t ask you how you’d feel about losing 25% of your portfolio value in just a few months. I think a question like that would provide a more accurate and objective assessment.
What’s more, none of the categories actually directs you into the Conservative portfolio. If you rate yourself as having a Lower risk tolerance — which is described as “(you) want to minimize risk and (are) willing to accept lower returns in exchange for lower risk” — you are instead guided into the Moderate Growth portfolio, which involves a higher level of risk. There doesn’t seem to be an option that would get you into a truly low-risk portfolio, which might be of interest if you were either retired or close to it.
However, a truly brilliant feature the application does have is a projection chart that’s based on the combination of your risk tolerance/portfolio designation and your investment parameters. It will show you the probability of achieving your investment goal within your expected time horizon. It shows you from the start how the process is likely to fare, giving you an opportunity to make adjustments out of the starting gate. This is an outstanding tool for a new investor.
For example, if it shows only an 80% chance I’ll make my investment goal in the expected timeframe, I can then choose to increase either my initial investment or my monthly contributions to move the probability closer to 100%.
TD Ameritrade Essential Portfolios Model Portfolio
The Essential Portfolios are made up of nonproprietary ETFs in order to provide you with fully objective investment choices. The ETFs are chosen from ETFs offered by either Vanguard or BlackRock’s iShares. Fund selection is guided by objective fund recommendations by Morningstar, and the portfolio is rebalanced to keep the allocation consistent with the portfolio objective.
Each Essentials Portfolio is comprised of five ETFs, plus cash. The ETFs have a weighted average expense ratio of between six and eight basis points (0.06% to 0.08%) in order to keep investment expenses to an absolute minimum.
For competitive reasons TD Ameritrade does not disclose the specific funds that are included in their portfolios; however, the asset classes represented in the investment mix include:
- U.S. Equities
- International Developed Equities
- Emerging Markets Equities
- U.S. Bonds
- Non-U.S. Bonds
As an example, the Aggressive portfolio contains the following asset mix:
- U.S. Equities, 55%
- International Developed Equities, 20%
- Emerging Market Equities, 10%
- Domestic Fixed Income (U.S. Bonds), 12%
- International Fixed Income (Non-U.S. Bonds), 2%
- Cash, 1%
More broadly, that represents a mix of 85% stocks, 14% fixed income and 1% in cash.
Investing Beyond Your Robo-Advisor Portfolio
One of the benefits of choosing a robo-advisor service through a well-established and diversified investment brokerage firm like TD Ameritrade is that you can have some of your money managed within the robo-advisor platform while still holding other investments that are invested in unrelated asset classes.
Beyond your positions in the Essential Portfolios, you can also trade and invest in stocks, bonds, mutual funds, certificates of deposit (CDs) and unrelated ETFs in your account. And if your account is approved, you can also trade options. TD Ameritrade has a $6.95 flat-rate commission on all online equity trades, which is extremely competitive.
That gives you the best of both worlds: a fully managed portfolio and the opportunity to participate in self-directed investing.
- Established Brokerage — Many robo-advisors are standalone investment platforms, with a short history and no connection to an established firm. Essential Portfolios has a recognized brokerage firm behind it
- Invest Beyond the Service — Your account enables you to trade in assets apart from your managed portfolios, giving you the ability to balance your holdings between managed assets and self-directed ones.
- Local Branches — TD Ameritrade has more than 100 branches located in major metropolitan areas around the U.S.
- Competitive Fees — Essential Portfolios' annual advisory fee of 0.30% is at about the middle of the pack among robo-advisors.
- Projection Chart — This feature allows you to see at time of application what the likelihood of achieving your investment goals will be based on your portfolio selection, investment contribution and time horizon.
- Opaque Asset Allocation — Essential Portfolios doesn't provide details of what is specifically invested within the service.
- Dividends Not Automatically Reinvested — Instead they are swept into a cash account.
- No Tax-Loss Harvesting — TLH is fast becoming a standard feature of robo-advisors, but you won't get it with TD Ameritrade.
Virtually every major investment brokerage firm has either rolled out or is in the process of introducing their own robo-advisor service. The advantage of large firms providing this type of platform is that you have an opportunity to mix in a fully managed and automated portfolio with other types of investments, including those that are self-directed. This takes the concept of diversification to a higher level and one that standalone robo-advisors typically don’t offer. Essential Portfolios fees are certainly competitive with many other robo-advisors.
TD Ameritrade should seriously consider adding tax-loss harvesting (TLH) to Essential Portfolios. The absence of this function could easily scare away investors who have large portfolios in taxable accounts.
Essential Portfolios seems best suited for retirement accounts and for new and small investors who can benefit from the firm’s size but may not be so concerned about the tax implications of investing. TD Ameritrade should consider lowering the account minimum requirement of $5,000 to something much lower or even all the way down to zero.