Account Minimum: $5000 – Fees: $0 – Best for: Experienced Investors
With almost 50 years of experience and almost $3 trillion in assets under management it is safe to say that Charles Schwab isn’t going anywhere.
TL;DR – Charles Schwab Intelligent Portfolios offers a robust product with a very broad range of investment opportunities. With no fees, the only real downside is that you need at least $5,000 to get started.
What is Schwab Intelligent Portfolios?
Put simple, it is a robo-advisor with no fees that invests in a range of low-cost ETFs. They pay no commissions or advisory fees. This is important because sometimes a financial advisor is paid by commission, which means they may sell you things you don’t need. With Schwab this is never the case.
Your investment strategy is decided based on a series of 12 questions that you answer when you create your account. They take your risk profile, timeline and goals to make sure they create a portfolio that’s right for you.
Most robo-advisors have limited options when it comes to funds. Schwab has a huge variety of options ranging from REITs to low cost ETFs. You can trade stocks and options at $4.95 per trade, which is one of the lowest prices in the industry.
Who is Charles Schwab?
Charles Schwab is an American businessman and investor with a current net worth totaling over $8.5 billion. He founded Charles Schwab, a bank and stockbroker in San Francisco, CA in 1971.
At the time salesmen made huge commissions selling stocks and set their own rates. Schwab decided to pay their salesman an hourly rate with no commission, and cut customer fees in half. Since then they have had a strong commitment to providing a great experience to the customer.
How Do Schwab Intelligent Portfolios Work?
Creating your account is easy, once you complete their brief questionnaire you need to put a minimum of $5,000 into your account. You have the option to choose from a variety of accounts including Taxable, Joint, Roth IRA, Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA and trusts.
Part of the Family
The biggest plus to using Schwab Intelligent Portfolios is that you are connected to the institution of Schwab. This means you hav:
No Fees – Many robo-advisors say this but don’t mean it. Here you truly have no fees. You will only pay the operating expense ration of your investment (OER). They break these down by your risk profile.
Conservative – 0.06%
Moderate – 0.15%
Aggressive – 0.20%
Even the most expensive portfolio with Schwab is going to be far cheaper than any other robo-advisor currently available.
Local Branches – Prefer talking to a human being? With Schwab that is an option. They have over 300 locations in the US. Odds are there is one near you.
Goals – Wealthfront, Betterment, WiseBanyan and other robo-advisors offer goal-based investing. With Schwab the same feature is available. Plan for your next home purchase, retirement or a new car at no extra cost to you.
Security – Some new financial products are not insured by the FDIC or SIPC. This means if the company goes under there is no guarantee you would get your money back. The SIPC is insures your account up to $500,000, including $250,000 in cash. If you use the Schwab Intelligent Portfolios Sweep Program you are also covered by the FDIC for up to $250,000 in cash.
Schwab Intelligent Portfolios Premium
If you have a minimum balance of $25,000 you qualify for the Schwab Intelligent Portfolios Premium program. With this you get unlimited access to certified financial planners.
This premium option costs $30/month (they bill $90 quarterly) plus an initial $300 planning fee.
This is a pretty steep fee especially if you look at it as a percentage of your portfolio. For the wealthier among us though this is a great deal. If your account is valued at $125,000 or more this fee would be one of the cheapest options available.
With companies that charge a percentage fee, you will pay more as you make more. With Schwab you pay less the more you make
Another thing to consider is the quality of financial advisor you work with. Charles Schwab has a very rigorous set of rules and principals their advisors must stand by. If you want to learn more about their standards check out this document about investment advice on retirement accounts.
Is Schwab Intelligent Portfolios as Good as They Say?
When you see a robo-advisor that seems this good, you start to doubt if it’s true. While they say these
Bonds Compromises Performance
On message boards a lot of people have commented on the bond allocation of their portfolio. The last couple of years have been an incredible time to be an investor, and some with Schwab Intelligent Portfolios have noticed poor performance due to bond funds. This seems to be an especially big issue with the robo portfolio, as other target date funds were not negatively impacted in the same way.
Performance Over Time
The reality of robo-advisors is that they are brand new. One of the most important things for investors is performance over time. Since Schwab Intelligent Portfolios just had it’s 4th birthday, it is far too early to tell whether or not these funds can perform well compared too historically well performing index funds like the S&P 500.
Underlying Expense Ratios
Shaun H. pointed out in the comments of this Investor Junkie article that the expense ratio of the underlying ETF is high. He gives the example of an emerging market (EM) fund that had 1/3 of its funds in a cheap Schwab EM index, but the other 2/3 with in a more expensive Schwab Fundamental EM.
Put simply, Schwab will put their customers funds in higher expense ratio ETFs when possible. This means you pay more for a fund that may or may not perform as well.
Money in the Bank
Scwhab Intelligent Portfolios requires you to keep anywhere between 6 and 30% of your portfolios value in cash. Doing this causes something known as “cash drag.” Cash drag occurs when too much of your portfolio is kept in cash and does not gain interest.
On their website Schwab says keeping some of your account in cash will help decrease the amount of risk you take on. This is technically true, but likely goes against the wishes of a more aggressive investor.
How Schwab Makes Money
The cash that you are required to keep in your Schwab account is supposed to do three things.
- Provide stability to your account
- Protect against financial downturn
- Additional Diversification
Nice explanation Chuck, but why do you really want me to keep my money in the bank? That question is the answer. Your money is kept in Schwab bank. That means they can profit off of your cash balance by lending it out. They aren’t transparent about this in their sales pitch, but it’s important to know why someone would offer to manage your money for free.
4 reasons we love Schwab Intelligent Portfolios
- Set and Monitor Goals – Most financial advisors now offer some sort of goal tracker. Schwab has a goal tracker that let’s you check to see if your saving and investing strategy is working to meet the goals you have set. They use Monte Carlo simulations to calculate a bunch of different potential scenarios and then you can see what your odds are of hitting your goal.
- Investment Options – Schwab has 53 different ETFs for you to choose from that cover 20 different asset classes. Here’s a whitepaper with the details on what they offer.
- Free or One Flat Fee – Their basic program is free to use for anyone who can make the deposit. No one else in the robo-advisor space has the range of options and flexibility that Schwab does. The flat rate on their premium program is a great deal, especially for higher net worth investors.
- Financial Advisors & Branches – Schwab is well known for their amazing customer service. Robo-advisors are hard because if you need someone to help you, you’re on your own. With Schwab you can talk to a trustworthy financial advisor or visit one of their local branches to get help.
Where Schwab Intelligent Portfolios could improve.
- Big Initial Investment – Almost every other robo-advisor has no account minimum. Schwab requires an initial deposit of $5,000. This may be a strategy too deter investors who are not serious, but it cuts out a lot of potential customers who want to start investing.
- No Fractional Shares – Similar to Robinhood, they do no offer fractional shares. If fractional shares are important to you check out M1 Finance.
- High Cash Postion – You are required to keep a fairly large amount of your investments in cash. This will earn zero interest, and can range anywhere from 6 to 30%. While this doesn’t sound too bad, it’s basically a hidden fee because not all of your money is earning interest. Even though your account is “free,” you’re still paying for it.
- Tax Loss Harvesting – They do offer if, but only once your account balance has reached $50,000. If this is an important feature to you but you have a low balance, a product like Wealthfront might be a better option (though they have a fee)
Schwab Intelligent Portfolios Review: The Bottom Line
With a strong history of trustworthy financial advice, some of the lowest cost funds on the market and no fees, Schwab Intelligent Portfolios is a great choice for people who can afford it.
The only thing to keep in mind is the largest cash allocation. If you are new to saving, investing this account may not be a good choice. However if you are a saver and know what you want, or your balance is over $125,000 this account makes sense.