Charles Schwab Intelligent Portfolio Review
SummarySchwab Intelligent Portfolio is for new investors who are looking for a low-cost, diversified portfolio of ETFs with automated re-balancing. This robo-advisor also represents a major savings over traditional, active management, and has an established brand name.
Assets Under ManagementUnknown
Number of UsersUnknown
|Account Value||Annual Fee|
|Single Stock Diversification|
|Tax Loss Harvesting|
Supported Account Types
|Roth IRA Accounts|
|SEP IRA Accounts|
|529 Plan Accounts|
How Does Schwab Intelligent Portfolios Stack Up Against the Competition?
Robo-advisor products are gaining popularity as investors with all levels of experience have begun to expect data technology take the lead and want a way to limit their emotional influence on their money. Charles Schwab’s entrant into this market is called Schwab Intelligent Portfolios. This new offering has some quirks that may give some investors pause.
Like competing products from Morningstar, Wealthfront, and Betterment, Schwab Intelligent Portfolios automatically rebalances investments over a range of asset classes. These services are a low-cost alternative to portfolios actively managed by a financial advisor, but also eliminate the headaches of constantly making adjustments manually. While Schwab prefers to describe its offering as automated investing, it works the same way as other robo-advisors.
The Schwab service is free to use for investors with more than $5,000 to begin with. Unlike many of the other robo-advisor products, Schwab never charges service fees, advisory fees, or commissions. There are annual fees for the ETFs, but these are automatically deducted.
Schwab intelligent Portfolio begins by having you compete a 12-step questionnaire. This is used to determine your risk profile, time horizon, and investment goals. After you have completed the questionnaire the Schwab algorithm sets your asset allocations.
Accounts that have $50,000 or more in taxable investments are eligible for tax loss harvesting.
Selection of ETFs
Compared to its major rivals, Schwab uses a much more complex mix of ETFs. While there are 54 different ETFs that can be used in any portfolio, no more than 20 will be used in a single portfolio. Even this mixture of 20 different ETFs is more than the major alternative robo-advisors offered by Wealthfront and Betterment.
In most any portfolio chosen by Schwab Intelligent Advisor, the ETFs will mostly be fundamental indexing as opposed to using market-weight. Some critics are concerned that the heavy use of fundamental ETFs increase the over all cost of the service because of the annual fees they charge. However, others counter that the use of fundamental ETFs reduces risk and may also increase returns. Only time will tell who is right about Schwab’s balance of ETFs in its portfolios.
One reason Schwab is so heavy on fundamental ETFs in the robo-advisor portfolios is that Schwab owns many of these ETS. This means that unlike many other robo-advisors, Schwab is more than just a broker, using ETFs provided by Vanguard and iShares.
Schwab does allow you to remove up to three of the ETFs it selects for you from the portfolio. This unique option among other robo-advisors, could be used by an investor to lower costs by cutting three expensive ETFs. However, given that the selling point of the service is to automate your investment, its questionable how often this option will be used.
Why So Much Cash?
The biggest weakness of this Schwab offering is the forced cash allocation. Depending on how you completed the questionnaire, your portfolio could have anywhere from 6% to 30% of the money allocated to cash. You cannot adjust this allocation. While most of the other robo-advisors allow for portfolios with 0% cash allocation, Schwab forces everyone using the product to have some money in cash.
Why does Schwab do this? Schwab claims that the use of cash will help smooth out returns. Looking at the numbers, this is a reasonable assertion. However, Schwab may have ulterior motives for the forced cash position.
Schwab holds the cash at money market rates. Your cash can then used by Schwab make profits elsewhere, potentially paying for the “free” product you are utilizing.
Large allocations of cash have the strong potential to be a drag on returns. The larger your portfolio value and the more time that passes, the larger the drag from the cash will be. If you have a relatively small portfolio, the drag from cash may not matter, and can be thought of as part of the fee for the otherwise excellent Schwab tools.
However, many investors may be nervous about having such a large percentage of their portfolio locked into cash.
Comparing the Competitors
Schwab continues to be a leader in the DIY investment industry for a reason; they know what their customers want. The no fee service will rightfully grab a lot of attention and gives the Intelligent Portfolio an advantage over many other services that only start free, but add fees as portfolio values increase.
Schwab has more diverse asset classes than any of its rivals. However, it is unknown whether this diversity will actually improve returns or will just increase annual fees through the use of fundamental ETFs.
Schwab requires a larger amount, $5,000, than Wealthfront, $500, or Betterment, no minimum, to open an account. But, the $5,000 is half of FutureAdvisors minimum of $10,000, and will not be a significant barrier to anyone serious about using the product.
Schwab is the only robo-advisor that has a mandatory cash allocation as part of the portfolio. This will be the biggest drawback for many investors. But, the actual effects it will have on asset growth are not yet known.
Schwab Investment Portfolio is a solid addition to the robo-advisor space. However, investors with larger accounts may wish to avoid the product so they are not forced into such a large cash position in their portfolio. Over the long-term the large cash allocation may be a drag on returns. But, even if it does act as a stabilizer as Schwab claims, because you are not able to adjust the percentage allocated to cash, you may want something that offers you a lit bit more control.
The cash allocation should not be a deal breaker if you are investing less than $50,000. The drag on your investment will be minimal compared to the stabilizing effect of the cash as part of the portfolio. Schwab Intelligent Portfolio also is a great deal from the standpoint of costs and fees. Only time will tell how Schwab’s algorithms will perform compared to other robo-advisors, but it does use overall sound investment strategies in the initial asset allocation.
Charles Schwab Intelligent Portfolio Reviews
Like all robo-advisors, Intelligent Portfolios represent a major savings over traditional, active management. Anyone who’s new to investing or just wants a simple way to build an investment portfolio should consider Schwab’s new service as a worthy rival to other robo-advisors. If you are interested in robo-advisors but prefer the comfort of an established brand name, the Intelligent Portfolios service is definitely worth checking out.
Overall a decent service that deserves a looking into. Though we question its large allocation to cash and choice of some of the ETFs in order to make the service free.
The biggest red flag is that the Intelligent Portfolios algorithms are biased to allocate a large chunk of your money to cash, and that cash is swept into a Schwab Bank account. Schwab Bank will then lend your money out or invest it (as with any bank deposit) and earn a profit.
I had high hopes for Charles Schwab’s upcoming robo advisor product Schwab Intelligent Portfolios. It’s supposed to have Schwab’s brand, scale, customer service, IT infrastructure, low-cost ETFs, and zero fees above the underlying ETF expenses. However, Schwab had to make it not so clean-cut. What could’ve been a very compelling product all around is now a little difficult to explain. Instead of an unequivocal “sign me up” people are given some reasons to debate, hesitate, and possibly be consumed by procrastination and inertia.
Schwab's big bet on developed-market small-caps might be perfect for Chuck, given his profiled above-average risk tolerance and his 15- to 19-year investment horizon. That is, if small-caps continue to outperform versus the overall market, as they have for the past five years. But small-caps can be quite risky, falling harder than large-caps when markets turn south. That's what makes this such a big bet, and why it's clear that this new so-called intelligent portfolio isn't just a me-too product. It might not be for everyone, but that's OK. Investor choice is a good thing, especially when competition drives innovation.
In summary, investors looking for a low-cost, diversified portfolio of ETFs with automated re-balancing may find value in Schwab’s Intelligent Portfolios. However, the greatest beneficiaries of this new robo-advisor tool may be Charles Schwab and its shareholders.