Charles Schwab is a goliath online broker with over $3 trillion under management.

The company offers many different services, from their advisory arm to a fantastic online brokerage platform.  They have offices around the U.S. and I will tell you I have been a Charles Schwab client for years.

Until recently, I hadn’t looked into Schwab’s robo-advisor; all this time I’ve been a Charles Schwab customer, yet I’ve known very little about their robo-advisor.

And, guess what…

While doing this Intelligent Portfolios review, Charles Schwab has seriously surprised me.

The Intelligent Portfolios platform has no management fee, it provides tax loss harvesting for accounts over 50k, and there is even goal-based technology for investors.

It’s a seriously impressive robo-advisor, and I’m sure this extensive Charles Schwab Intelligent Portfolios review will help you decide if its right for you.

Let’s get into the details.

Charles Schwab Intelligent Portfolios Review

Charles Schwab Intelligent Portfolios Features

About Charles Schwab Intelligent Portfolios fees and features

• Management Fees – 0 %
• Minimum investment – $5,000
• ETF Fees – Yes. Fees are charged on underlying ETFs.
• Asset allocation – Allocates money based on risk tolerance investment algorithm
• Goal-based investing – Charles Schwab Intelligent Portfolios offers a goal-based investment program called Goal Tracker to help you stay on track for life events like retirement.
• Charles Schwab Intelligent Portfolios Investment options – Investments available through Charles Schwab Intelligent Portfolios include:
  • Stock ETFs
  • Bond ETFs
  • No Individual stocks, bonds, or mutual funds available in Intelligent Portfolios. However, with Charles Schwab brokerage account they are available..
  • Stock mutual funds
  • Bond mutual funds
  • Real estate investment trusts
• Charles Schwab Intelligent Portfolios options – Accounts available including:
  • Taxable account
  • Traditional IRA
  • Roth IRA
  • SEP IRA
  • SIMPLE IRA
  • Trust
  • Custodial
• Lending – Charles Schwab Intelligent Portfolios does not allow you to lend against your portfolio. However, Charles Schwab brokerage does have lending capabilities available.
• Promotional offers – Refer a friend to Charles Schwab and your friend will receive $100 deposited in their account.

Positives of Charles Schwab Intelligent Portfolios

• Fees –  The fee structure for Charles Schwab Intelligent Portfolios is top-notch.  Intelligent Portfolios charges NO management fee, whereas companies like Wealthfront and Betterment charge a minimum of 0.25%.  Other robo-advisors can charge 0.5% or even more for their management fees.  Charles Schwab is considered an elite robo-advisor in the fee category.
• Goal based investing – Intelligent Portfolios uses Goal Tracker to help you track and manage your retirement goals.  This is important for many investors to visualize if they are on track to retirement and how much they can expect to spend during retirement.
• Algorithm-based passive investing – Schwab’s robo-advisor uses an algorithm to invest your money. You answer initial questions and Schwab will provide you with a recommended allocation.  From there, Schwab will keep your money invested as it automatically rebalances your allocations.  
• Rebalancing – Rebalancing comes standard with most robo-advisors. It allows robo-advisors to keep your  investment allocations at their ideal percentages.  You don’t have to worry about your portfolio drifting into an undesirable allocation mix.
• Tax loss harvesting (TLH)– Charles Schwab Intelligent Portfolios does offer tax loss harvesting (TLH), but only for accounts with $50,000 or more. TLH is an important factor for those who have a taxable account (not an IRA).  The company can sell some ETFs at a loss while selling other ETFs with gains.  The losses can be written off against the gains for more efficient taxation.
• Smart beta – Charles Schwab offers smart beta investment allocations. Smart beta is a different way of weighing an index fund based on the fundamentals of companies.  Some investors like this concept and find value in the integration of smart beta.
• Promotional offer – It is always nice to have a sweetener when using a company service. Charles Schwab allows you to invite users of their services.  If your referral signs up, he or she will receive $100.

Negatives of Charles Schwab Intelligent Portfolios

• Account minimum – At $5,000, Schwab has a rather high account minimum for robo-advisors.  Companies like Wealthsimple and Betterment have no account minimum; a lower account minimum allows you to test a robo-advisor so you can have a better idea if you like the platform.
• Cash balance of portfolio – A critique of Charles Schwab Intelligent Portfolios is its use of cash in the portfolio.  This can range from 6% to almost  30% of the portfolio.  Schwab does have an explanation for this, and I included a more in-depth summary of why they do this below.  Basically, Schwab uses the cash to reduce volatility and tries to create the same risk adjusted returns as a similar portfolio having short-term treasuries.  I do believe their strategy of cash is misunderstood.
• No Factional Shares – Unfortunately, Schwab doesn’t use fractional shares in its Intelligent Portfolios robo-advisor. Using fractional shares can allow a higher allocation to be invested at all times.  While it is somewhat small, it still helps.
• Socially Responsible Investing  – There is no option for a socially responsible investment (SRI) in the Schwab robo-advisor.  If you want exposure to SRI, you can invest in Schwabs individual SRI funds.  Options for SRI investing include Wealthsimple and Swell Investing.
• Goal Tracker doesn’t integrate  – Companies like Betterment and Wealthfront have the technology to link your external accounts and track your goals; anything from your credit card to your saving account can be included in your goals.  Schwab doesn’t have this functionality.  It does provide a way for you to include goals for your investments, but it doesn’t integrate with the rest of your financial picture,

Charles Schwab Intelligent Portfolios Competitors

Below you will see comparative tables showing Charles Schwab Intelligent Portfolios vs. M1 Finance and Wealthfront.

How does Charles Schwab Intelligent Portfolios work?

Charles Schwab Intelligent Portfolios is a robo-advisor that leverages a risk tolerance questionnaire and personal information to help create a portfolio for you.

You will see this screen when you begin.  As you can see, it should only take 10 minutes to go through the questionnaire.

As you will see below, there are multiple account options available to you.  These accounts include taxable brokerage, IRA and Roth IRA, trust accounts, among others.

You can select the option that best suits you. 

One interesting integration not used by many robo-advisors is the ability to include municipal bonds in your taxable account.  Municipal bonds generate tax-free income so they can benefit your portfolio if you are interested. You have the option to opt-in or not.

After the account information is completed, you will proceed to risk tolerance questions.

Below, you will see that I was determined to be the most aggressive.  Schwab suggests an allocation of 94% stocks with 6% cash (more on Schwab’s use of cash below).

The actual allocations can be seen below.

The risk-tolerance process is quite quick and simple. You can be done within 10 minutes and know what Schwab will suggest for an individual portfolio.

Charles Schwab Intelligent Portfolios Investment Allocations

Schwab has a highly diversified investment platform utilizing over 50 ETFs.  You will see that each ETF has a counterpart – this is to help with tax loss harvesting (more on that later).

The asset classes include the following:

Stocks

• US Large Company Stocks
• US Large Company Stocks–Fundamental
• US Small Company Stocks
• US Small Company Stocks–Fundamental
• International Developed Large Company Stocks
• International Developed Large Company Stocks–Fundamental
• International Developed Small Company Stocks
• International Developed Small Company Stocks–Fundamental
• International Emerging Market Stocks
• International Emerging Market Stocks–Fundamental
• US Exchange-Traded REITs
• International Exchange-Traded REITs
• US High Dividend Stocks
• International High Dividend Stocks
• Master Limited Partnerships

Fixed Income

• US Treasuries
• US Investment Grade Corporate Bonds
• US Securitized Bonds
• US  Inflation Protected Bonds
• US Corporate High Yield Bonds
• International Developed Country Bonds
• International Emerging Market Bonds
• Preferred Securities
• Bank Loans
• Investment Grade Municipal Bonds
• Investment Grade California Municipal Bonds

Commodities

• Gold and Other Precious Metals

Cash

• FDIC-insured cash

*Source: Charles Schwab

Charles Schwab Intelligent Portfolios Tax-Loss Harvesting

Tax loss harvesting is an important feature of most robo-advisors.  As you can see from the ETFs above, each Schwab ETF has a counterpart ETF in the same asset class.  Schwab can sell the Schwab ETFs and buy the counterpart ETFs to help them wash taxable gains.

How can Charles Schwab Intelligent Portfolios not charge a management fee?

Charles Schwab has a strategic advantage over its competitors.  Because Schwab is such a large, full-service broker, it has developed its own in-house ETFs.  Schwab earns the entire profit from the fees charged by the ETFs.  This way, they don’t need to charge a management fee, since you already pay them fees through their ETF expense ratio.  For a company like Wealthfront or Betterment, they don’t own the ETFs – the revenue charged by fees on ETFs doesn’t go to them as the robo-advisor.  This is why Schwab has such a strong advantage over much of the competition.

Charles Schwab Goal Tracker

The Goal Tracker from Schwab isn’t bad.  It has perfectly fine functionality for tracking retirement and income needs.

However, it doesn’t have the functionality to link external accounts and create a comprehensive picture of your finances.  Companies like Betterment and Wealthfront do a much better job with integrating external accounts and creating an overall financial picture.

Charles Schwab Intelligent Portfolios Smart Beta   

Charles Schwab incorporates smart beta strategies into the Intelligent Portfolios platform.

What is smart beta?

It is an alternative way of creating an ETF or index.

Many indexes, such as the S&P 500 index, are market cap weighted.  This means that larger companies have a higher percentage in the portfolio.

A smart beta strategy weighs the companies by factors instead of their size.

Is smart beta a good thing?

There is no guarantee it will increase returns, and I see it as better for marketing than potential returns.

Sure, it may add a few percentage points.

However, it may lag by a few percentage points as well.

I wouldn’t put too much time analyzing robo-advisors based on their smart beta strategies.

Understanding Charles Schwab’s cash allocation

One important factor to understand when it comes to Charles Schwab is their use of cash in your portfolio.  As you know, cash doesn’t do much, other than earn a bit of interest.

So, why does Schwab hold 6% to almost 30% in cash?

I’ve thought a lot about Charles Schwab’s cash position as well as done research into why they allocate a higher portion of their portfolio into cash than other robo-advisors.

In the end, I don’t love the cash allocation of Charles Schwab.

However…

I understand their argument, and it likely nets out the same return as other robo-advisors using short-term treasuries.

To be very brief and non-technical, Charles Schwab uses cash to lower the volatility of your portfolio and attain a risk-adjusted return for your risk appetite.  Another way to say this is they use cash that is less risky, they then increase the risk of other investment because they use cash that is less risky.

We can get a bit more technical, but not too technical for this review.

By the way, here is a link to Schwab’s explanation of their cash position: Intelligent Portfolios Cash Position

When I went through the risk tolerance questionnaire for Charles Schwab Intelligent Portfolios, I came back with the highest risk profile.  With this profile, I was allocated into 6% cash 94% stock ETFs.

To compare this to Betterment, when I did their risk assessment, I also came back the riskiest, and I was added to 10% bonds 90% stock ETFs.

To understand what is happening here, you need to think whether having 6% cash and 94% stock exposure is the same as having 10% bond and 90% stock exposure.

On a scale of risk and return, are these similar?

This is the argument Schwab is making – that, yes, they have cash, but it is adjusted by the risk the overall portfolio is taking.

Another idea is to imagine both Wealthfront and Betterment holding no cash in their portfolios, but, instead, they hold short-term treasury ETFs (such as SHV).

The short-term treasury ETF comes with an expense ratio; there is a charge for this ETF to be held in the portfolio.

For Charles Schwab, they do not hold the cash in an ETF charging a fee.

This lack of fee is another factor in Charles Schwab’s approach to holding cash in the portfolio – it lowers the overall expense ratio of the portfolio.

If you were to assume that taking that cash and reallocating it proportionally across all your other asset classes, you would end up taking higher risk.

The risk the portfolio takes is measured against the fact that it holds a portion in cash.

Schwab is arguing the risk of the portfolio takes the cash position into consideration.  Maybe they increase the risk of the other ETFs because they have a cash cushion in the portfolio.

In the end, if Schwab uses cash in lieu of bonds to reduce risk, and increases its exposure to equities, it may net out just as Schwab says.

Read Schwab’s explanation of cash for more details: Intelligent Portfolios Cash Position

Charles Schwab Intelligent Portfolios review conclusion

Who is Charles Schwab Intelligent Portfolios good for?

• Low-cost investors – If you are looking for the lowest cost passive robo-advisor, Schwab is the winner. With no management fees, other large robo-advisors like Wealthfront and Betterment can’t compete with Schwab’s low fee.
• Passive investors – Charles Schwab Intelligent Portfolios will be good for you if you are a set-it-and-forget-it type of investor.
• Investors with taxable accounts over 50K – If you have a taxable account with over 50k, you will receive tax loss harvesting services from Schwab. This will help increase your long-term portfolio value by reducing taxes.

Who is Charles Schwab Intelligent Portfolios not good for?

• Socially responsible investors – Unfortunately, Charles Schwab Intelligent Portfolios falls short on its socially responsible options.  However, Schwab does offer socially responsible investment ETFs in its brokerage platform.
• Those interested in planning software – Schwab offers technology for tracking life goals with Goal Tracker.  Unfortunately, Goal Tracker doesn’t integrate with outside accounts.  If you want a comprehensive financial picture, you will not be able to achieve this.  Other companies, like Wealthfront and Betterment, allow integration for goal tracking between everything from credit cards to savings accounts.

My option on Charles Schwab Intelligent Portfolios

I’m a big fan of this robo-advisor.

When it comes to the low-cost  passive robo-advisors, Schwab wins the test.

While Wealthfront and Betterment are great, they carry a minimum 0.25% management fee, on top of their ETF fees.

Yes, Wealthfront and Betterment have superior goal-based technology and more advanced tax-loss harvesting.

However, after factoring all of this in, Charles Schwab Intelligent Portfolios provides a great investment platform with no management fee and is likely better for many people.

Is the 0.25% fee worth it for Betterment or Wealthfront just to have access to their technology?

For me, it’s not.

However…

If you care about the technology, maybe one of them will be better suited for you.

Another area you will find criticism is the cash holdings of Intelligent Portfolios.  As I discussed above, this shouldn’t worry you, since Schwab is attempting to create a portfolio with the same risk and return potential as other robo-advisors, they just use more cash when doing so.

In my opinion, after a deep dive into Charles Schwab Intelligent Portfolio, it’s the best overall passive robo-advisor for those who don’t prefer the best technology or socially responsible investing.

Do you use Charles Schwab Intelligent Portfolios?

Do you use one of their competitors?

I’d love to hear about your experiences below!

Disclaimer: These are the ideas and opinions of the author.  The author is not responsible for the actions of those who read the posts on this blog.  Each individual reader has a unique situation and unique needs.  This blog is not intended to solve those unique situations of the readers.  This blog is not liable for decisions made by the readers of this blog.

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