Schwab intelligent portfolio review: A vertically Integrated Robo Advisor

Charles Schwab name might sound familiar to a lot of our readers; They were the original guys who went about disrupting the brokerage market with their discounted brokerage services. That was more than 40 years ago; now the financial services veteran has its eyes set on disrupting the Robo Advisory space with their free Robo Advisor Schwab Intelligent Portfolio. It would be interesting for readers to note that even after charging fees not a single Robo Advisor is profitable as of now. Then how does Schwab Intelligent Portfolio Make money, what does it offer to its already large brokerage client base? We cover all of that in our  Schwab Intelligent portfolio review.

What does Schwab Intelligent portfolio offer?

The service is somewhat similar to what a Wealthfront or a Betterment offers. The Minimum investments start at $5000, but to get full access to its offerings like Tax loss harvesting, etc.  you need at least $50000 in your account. This $50000 minimum for tax loss harvesting might look significantly higher than its competitors; Wealthfront offers the same service to entry level account starting at $5000, in the case of betterment its available for all taxable accounts. Once you have opened your account, like other advisory services you are asked a series of questions to ascertain your investment goals, risk profile, and the investment timeframe. While most Robo Advisors offer you as model portfolio based on your answers, Schwab Intelligent portfolio is different in this regards. The service although assigns you a series of Schwab’s own ETF’s (more about this later), it offers the users the ability to customize their portfolio.An Investor if he wishes can delete 3 ETF’s selected by the algorithm.

Schwab Intelligent portfolio also offers you a feature to track your investment goals. The goal tracking features updates you on how your Intelligent portfolio is doing in respect of Goals set by you.

Schwab intelligent portfolio review Picture

Schwab Intelligent Portfolio Strategy

The Robo Advisory service invests in its own ETF Universe. Its universe comprises of 54 ETF’s covering 20 asset classes.The diversity of the Asset class in noteworthy and much more complex than what its competitors offer. Betterment offers ETF’s covering 12 asset classes, while Wealthfront exposure is limited to 11. So much diversity might not be necessary for an average investor, to whom most of this kind of services is targetted in the first place. However, it does make sense when you have account size exceeding $100000. We are of the opinion that Schwab wants a share of Institutional business too. Another interesting bit that we noticed is the fact that a significant part of the Money you put out to invest is kept in the form of Cash. The cash allocation can range from 7% to 30% of a portfolio. Some of the Schwab Intelligent portfolio review have called it a way for Schwab to make money on the interest to pay for the discounted service. We believe it is a strategy from Schwab to encourage Institutional investors to opt for Intelligent portfolio. As most, Institutional investors do not like to be fully invested and prefer to keep a substantial amount in cash for future contingencies and buying opportunities.

How does the Schwab Intelligent portfolio make money?

Schwab has marketed the service to be completely free; it does not charge a fee to manage the funds. It makes money from the operating expenses on the individual ETF’s which range from 0.04% to an astounding 0.48%.The amount you shell out on operating expense depends on the kind of model portfolio you are assigned to. The final cost is essentially the weighted average of the ETF’s cost you are assigned to. The costs scale up with increasing risk.Hence the conservative Investor would end up paying less compared to an aggressive investor in terms of fees. Having said that, Schwab Intelligent portfolio still ranks much below the average going rates for Robo Advisors.

Schwab also makes money off the uninvested cash,.It earns on the spread, Similar to a bank. Although many have raised questions about the practice and have asked for more transparency on the subject.

Schwab intelligent portfolio review : Summary

Although we see a varying amount of limitation in the overall services offered, we do understand the services are still relatively new. We believe the service is, in particular, useful for those who have been waiting for a low-cost, but highly reputable brand .Also not to forget the level of asset class exposure is far greater than any existing Robo Advisor. The biggest drawback of the service seems to be the high exposure to cash which might be a big turn off for retail investors. But we are still early days in the Robo Advisory market and Charles Schwab’s words it is essentially a strategy to keep cash in the portfolio. Although a lot of millennials might not agree on this part, we see it as being integral in bringing in the big boys (ie  institutions and seasoned investors ) .