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