Charles Schwab unveiled a free online investment advisory service. It’s called Schwab Intelligent Portfolios.
Like the other so-called robo-advisors such as Betterment and Wealthfront, Schwab’s computer algorithm is going to suggest and manage a portfolio of ETFs for you. The minimum is only $5,000. You can have IRA and taxable accounts. You can fund the account with recurring deposits. It’s automatically rebalanced. Once you have $50,000 or more, you also get automated tax loss harvesting.
The big difference is that Schwab’s service is FREE: no trading commission, no advisory fee, no service fee. You just pay the normal expense ratios on the underlying ETFs. And it comes with Schwab’s brand name and its customer service.
Vanguard’s Personal Advisor Service has a $50k minimum and a 0.3% advisory fee. The service comes with a human advisor on top of automated investing.
Before Schwab and Vanguard came in, Betterment and Wealthfront were leaders in this software-based investment management space. They have low fees (0.15% – 0.35% on top of ETF expenses) but they are not free. When 800-pound gorillas such as Schwab and Vanguard come in with a competing service, does it mean game-over for Betterment and Wealthfront?
The market is big enough for multiple players. Betterment and Wealthfront have proven there is great demand for this type of service. Wealthfront grew from nothing to $1 billion in 2-1/2 years, whereas if a traditional investment advisor manages $1 billion after 15 years in business it would be a tremendous success.
Schwab is aggressively marketing its service in multiple channels. Potential investors are attracted to its low cost and brand name. In the short time since it launched, it already attracted $1.5 billion, most of which from existing Schwab customers.
Schwab primarily features its own ETFs in the Schwab Intelligent Portfolios service. The Schwab market-cap index ETFs have low expenses, which often even beat the comparable Vanguard ETFs. Its fundamental ETFs are more expensive but they have the potential to perform better. I would be more comfortable with holding my account at Schwab than at Betterment’s or Wealthfront’s partner Apex Clearing.
It’s not about Schwab versus Vanguard versus Betterment versus Wealthfront. It’s about low cost indexing versus speculating versus active management versus high sales commissions and management fees. Whether investors choose the service by Schwab, Vanguard, Betterment, or Wealthfront, they ultimately benefit from low cost indexing. Rather than trying to pick hot stocks, timing the market, or being sold expensive load mutual funds, they just send money over to the service of their choice. All the rest will be taken care of at a very low fee.
See follow-up articles:
- Schwab Intelligent Portfolios: “Holding Cash Is Good For You”
- Schwab Intelligent Portfolios: The True Cost of A Cash Drag
- Schwab Intelligent Portfolios: Primary and Alternate ETFs
- Vanguard Personal Advisor Services: Talk to A Human Advisor
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Well at least Schwab did not put up a secret link. The link is currently up right smack in Schwab’s home page.
I agree that this market is big enough for multiple players. One downside I see for the Schwab model is the 5K minimum. A large slice of the people using these Robo advisors are “younger” folks where 5K might be a lot to place into a taxable account. Betterment does not have a minimum as long as you invest $100 per month (otherwise its $3 per month fee). I do think Wealthfront has a 5K minimin, but it free for up to 10K. So all three have different models….interesting. Wonder if Vanguard would offer this service with a lower minimum (and still free).
That being said, once I fully max a 401k and Roth IRA AND get at least 5K in my Betterment account, I will switch it to the Schwab service…
Harry Sit says
All of them offer IRAs. Young investors can set up their IRAs there. I think $5,000 minimum is low enough. Vanguard’s $100k minimum is a more substantial hurdle. Vanguard said to news media it’s working toward a $50k minimum, which is still much higher than Schwab’s $5k minimum.
Maybe I am missing something but what is the advantage of Tax Loss Harvesting within an IRA?
Harry Sit says
The Tax Loss Harvesting service is only performed on taxable accounts.
Do they do any allocating between taxable and tax advantaged in an intelligent way (e.g., put bond funds in tax advantaged, though there are other things that can be done as well)
Harry Sit says
Don’t know. We will have to wait. I signed up for their “keep me posted” list.
I can guarantee you they will. That is a no brainer
Had a question.
We have stayed away from taxable accounts as not familiar with tax loss harvesting and the fact that real estate is currently our taxable account substitute. Taxable accounts could be an option with the tax loss harvesting as part of the process, once we have attained our real estate goals.
My question was does the schwab tax harvesting service provide all the benefits of tax loss harvesting?
Harry Sit says
I’m not sure what you mean exactly by “all the benefits of tax loss harvesting.” If you are asking whether Schwab’s tax loss harvesting will be as rigorous or as thorough as the similar service by Betterment or Wealthfront, we simply don’t know at this point.
I personally would not place too much weight on tax loss harvesting. It sounds clever but until there’s a big crash it simply doesn’t make enough difference. When there’s a big crash, you will know. You don’t need a computer to tell you. As long as Schwab’s tax loss harvesting service does the basics, it will be good enough. You don’t have to be super-vigilant about it.
Tax loss harvesting is a great strategy. You don’t need a crash to take advantage of it. One big benefit of these offerings is they offer negatively correlated investments, so chances are very good there will be some positions with losses that can be used to offset gains.
Thanks for the answers.
Big George says
I have been using Schwab’s low cost ETF’s, which I rebalance to my target allocation monthly. I will be interested to see if the if the tax lost havesting considers potential wash sale implications. Mostly I am intrigued by the possibility of Schwab automating what I am now doing manually.
I would bet they will make sure to follow wash sale rules. Otherwise why even do tax loss harvesting?
I assume Schwab is a market maker for their ETFs, so every trade benefits them by the bid-ask spread. So the more ETF rebalancing that occurs, the more Schwab makes and the more the investor pays. This is going to be a fairly small cost to the individual investor, but it is a cost nevertheless. The accumulated small costs to each investor will add up to enough to make it worthwhile to Schwab. For those comfortable sticking with the mutual funds and avoiding ETFs, they can rebalance themselves and save the small bid-ask costs of rebalancing with ETFs.
I doubt that will be a driver. The extra costs of mutual funds make ETF’s so much more attractive. I don’t think mutual funds rebalance themselves. If percentages get out of whack, you will have to sell and buy funds to get your rebalancing.
What kind of trades do the competitors do, for tax-loss harvesting? If a domestic equity ETF is down for a while, do they sell it for you and buy a slightly different domestic equity ETF?
Harry Sit says
Yes, they do that. See Betterment white paper and Wealthfront white paper.
I currently have a bit over $100,000 invested in both Betterment and Wealthfront….each. My total investment (taxable) currently between the 2 services is about $210,000 or so. If its not clear what additional benefit I’m getting for paying up to 0.35% on that balance ($735 in fees), then I’m switching over to Schwab toot sweet.
Capitalism can be a bitch for businesses, but for the consumer, its great.
jake – Did you use the same risk profile for Betterment and Wealthfront? If so, how different are the two portfolios? Which service do you prefer?
I’m with you . I have 100 k in Wealthfront and Betterment and like Schwab’s philosophy and class.
Does anyone if Schwab’s product includes the following service:
I want to draw x amount per month from my portfolio (I’m retired).
Will Schwab send me a monthly “paycheck” drawn from my portfolio in the most tax efficient way (i.e. 75% from taxable accounts and 25% from tax advantaged accounts)?
My entire portfolio is now with Vanguard but it is up to me to decide, with the advice of a CPA, from where (tax advantaged or taxable) to draw down my monthly “paycheck”.
Harry Sit says
Until Schwab launches the product or comes out with more information, we simply don’t know. Vanguard’s Personal Advisor Service includes that as part of its service, which costs 0.3% of assets.
“The Schwab market-cap index ETFs have low expenses, which often even beat the comparable Vanguard ETFs.”
Could you please elaborate and show us which Schwab ETFs beat the comparable Vanguard ones? I was under the impression Vanguard wins the majority of the time, and that they are not “often” beat….
Harry Sit says
I meant they beat comparable Vanguard ETFs in expenses. See Schwab Market-Cap Index ETFs. Note there are three tabs: domestic equity, bond, and international equity.
I’m pretty sure Betterment does not use Apex. One of their big selling points is that they control the whole platform bottom up. Betterment is the custodian, they do not use a 3rd party like Apex like Wealthfront does.
Harry Sit says
Betterment let you down. From Betterment Customer Agreement:
“5. Possession and Control of Securities. Client understands and agrees that Betterment Securities has entered into agreement with Apex Clearing Corporation (“Apex”), pursuant to which Assets maintained within the Account will be held at Apex.”
Lord Sakana says
SigFig announced a similar service. First $10,000 free, then 0.25% after that. And you can keep your funds with Schwab, Fidelity, or TD Ameritrade.
Retirement Savings Investor says
I have $200K invested with SigFig in their managed portfolio service. If the same money can be managed, rebalanced with no fees other than annual individual fund management fees then that seems logical. I would think Schwab’s website would provide similar easy to understand graphics interface similar to all three: Wealthfront, Betterment and Sigfig.
My question for FinanceBuff is whether there are potentially better returns if this size portfolio might not be better looked after if managed by the likes of Personal Capital. Not a suggestion, more of a question. Another point would be if it could be determined that potential returns would be better at Schwab than at Betterment, Sigfig or Wealthfront. There has to be a difference, even marginally, up or down between these firms and their choices of funds.
Harry Sit says
Any strategy has the *potential* of doing better than a different strategy. Whether that potential becomes realized is a whole different question. I compared the out-of-box portfolio recommended to me by Wealthfront and Betterment in Online Investment Management: Wealthfront, Betterment, Personal Capital. They were similar. Betterment’s had more value. Will more value lead to higher returns? You just don’t know. You can do the same analysis on the portfolio recommended by SigFig and see how it compares. In the end, you make a pick and you accept the results. There’s no way to say ahead of time who will do better.
Betterment definitely still has a place, with their “builder” plan, allowing individuals to maintain a low fee for any combination of automatic deposits totaling $100 a month, with no minimum to start with.
Wisebanyan takes it even further, with no minimum to start, no minimum required contributions, and no management fees. The fees for the etfs used themselves are averaged at 0.11% as well.
Rollie Seibert says
Will Fidelity be next?
Lord Fish says
Some details have come out regarding the Schwab Intelligent Portfolios. Apparently, Schwab will put 7% to 30% of your money as cash with Schwab Bank. Considering that the interest rate at Schwab Bank is almost zero, if Schwab puts a quarter of your portfolio in cash, it will cost you an implicit fee of 0.25% when you compare it with an online bank that pays 1%.
Harry Sit says
Not that much if I go by their three examples. 7% in cash for a 30-year old. 15% in cash for a 60-year old. I will have a new post about it shortly.
I am very impressed with this service, the asset allocation, and investment selections, however I found something that really caught my eye as a big negative. Schwab is charging no AUM fee, however in their FAQ they answer the question about how to they make money on this. They reference the expense ratios of the funds which are super low. No big deal there. They also mention making money in the spread on the cash portion of each portfolio. At first glance I had no issue with this. This is how banks make their money and the cash portion in this Schwab will be FDIC insured just like bank, however where I take issue is with the high % allocations that Schwab keep in all of their model portfolios. Cash is a great hedge against risk and volatility but it is crazy to keep 6% cash in a 94% stock portfolio. I answered their risk questionnaire with the highest risk tolerance answers and a long 30 year time horizon and Schwab is recommending their highest return and highest risk portfolio with is 94% stock, 6% cash portfolio. There is no reason to hedge risk and volatility when I have 30 years until retirement and have the highest risk tolerance. There is a significant opportunity cost. If I went 100% stock, I would average 8% return on that additional 6% cash allocated to stock. 8% of 6% equals 0.48%. That is the lost return every year allocating 6% to cash in a 94% stock portfolio and that is exactly how Schawb is making their money. It’s like paying them a 0.48% management fee as far as I’m concerned. At Betterment if I select their highest risk, highest return portfolio, I would have 100% stocks. Sure I could pay 0.15% but that is far less the the 0.48% I will lose with Schwab by having 6% sitting in cash for 30 years. Actually it becomes a lot more weighted to cash over time. Their 80% stock portfolio carries about 8% cash and their 60% stock portfolio goes to 10% cash. That doesn’t bother me as much because they portfolios need less risk and volatility but a 94% stock portfolio with 6% and a 30 year time horizon is crazy and I see no reason for it other than for Schwab to earn a spread on the cash.
Harry Sit says
94% in stocks is high enough. If you look at Vanguard’s Target Retirement funds, it tops off at 90% for someone retiring in 2060, 45 years from now.
Who’s to say 4% in stocks plus 6% in cash will do better or worse than 8% in US bonds plus 2% in international bonds? I haven’t heard anyone accusing Vanguard of having an extra 0.6% management fee because the 10% invested in bonds earning 2% would otherwise earn 8% in stocks.
Allan Roth says
I agree. All of these low cost options are good for the consumer!
Glenn Frank says
I wonder if Schwab’s current allocation to cash is a tactical move that will be reduced once the equity risk premium returns? Equity valuations from every relatively “independent” source I am aware of , indicate valuations accross the board, especially US, are historically very high. For example If you go to GMOs 7 year forecast (they are more accurate than anyone in the long-term that I know of) it indicates cash getting a higher return than the S&P.
Maybe Schwab is managing risk and the cash allocation won’t be there forever?
I do believe that many of the articles bashing Schwab’s cash allocation and equating it to a fee of .50 to 3% depending the percentage of cash are disingenuous. The cash allocation does come without some benefit. A manage fee has no benefit. The cash is risk free and provides diversification and negative correlation to stocks and bonds. I’ve done my due diligence and I am selecting Schwab’s intelligent porrfolios over Betterment and Wealthfront. I would be in a Schwab portfolio with 6.5% cash, so it’s not a huge deal.
I don’t like the fact that Betterment doesn’t allocate to real estate. I also like the international and emerging markets weightings better in the Schwab portfolios and I like their tilt to smart beta.
In my opinion, you can’t go wrong with Schwab Intelligent Portfolios, Betterment, or Wealthfront. It’s really splitting hairs and just comes down to personal preference.
For those already in retirement or close to it, I really like Betterment’s variable retirement income algorithm software program. If I was in retirement or close to it, I would choose Betterment to get access to their variable retirement income product offering.
“Vanguard’s Personal Advisor Service has a $100k minimum and a 0.3% advisory fee. Even though it’s been in the news for months, it’s still not formally announced. It’s nowhere to be found on Vanguard’s website unless you happen to know the secret link.”
Why is Vanguard’s Personal Advisor Service being mentioned in an article on Schwab Intelligent Portfolio? Are these head to head competitors? Is Vanguard’s Personal Advisor Service also a robo service?
Harry Sit says
I see it as a head-to-head competing service. It’s managed by human advisors, with human interaction. It’s a higher level of service, which also requires a higher minimum than the robo-advisor services, and at a slightly higher all-in cost, but the cost is still in the same neighborhood. The secret link is here:
The latest from the press said the minimum will drop to $50k.
Can you compare Vanguard’s Personal Advisor Service and Schwab’s Intelligent Portfolio?
[I do recall your comment “either of these are better than trying to pick hot stocks, timing the market, or being sold expensive load mutual funds or wrap accounts” (paraphrase)]
Schwab’s robo-advisor sounds fine and dandy with that big, giant “FREE” neon sign flickering. Alas, it is not free. between 6% and 30% of your portfolio will be held in cash – a very poor decision for long-term returns. That’s how Schwab makes money off this program – by earning on the cash returns invested in these portfolios.
Nice try, but Betterment provides free tax loss harvesting with no minimum balance – which can save up to .77% on your annual ROI. For a small-time loner investor with ~x,000 dollars to invest, this is a big deal. Wealthfront also provides tax loss harvesting, with no maintenance fee under $10,000. Betterment’s maintenance fee is just .35%.
Do your research, you’ll find the better option doesn’t lie with “Chuck”.
I am 66 and have been managing my own portfolio for 5 years after very bad experience
with Financial Advisor. I have done pretty well but now I want to be more cautious. Would the
Robo Advisor from Schwab be a good choice. I am all about low fees and have many Vanguard
mutual funds. Now have everything at Scottrade.
Harry Sit says
Dave – It’s one of several good choices. See the last paragraph and follow-up articles.
Im am not familiar with Schwab, but the article makes it sound like they are cannibilizing from their fee based business. That does not sound like a recipe for success.
Harry Sit says
Existing Schwab customers are at risk of being lured away. They don’t necessarily have most of their assets with Schwab anyway. The product will make them stay and bring in more assets.