Robo Fee Wars
Nash isn’t blameless, though. He’s right to assert that robo clients should consider all-in costs, rather than just the headline numbers. But he might be exaggerating Schwab’s cash-related costs.
He’s surely seen Schwab’s pitch for no fees, commissions or account service fees. He must hate how Wealthfront’s meager 0.25 percent fees look expensive in comparison. But he’s overstated his case.
Schwab’s cash allocation most likely replaces fixed income rather than equity. I’ll admit I haven’t yet been able to analyze Schwab’s fixed-income portfolios, because Schwab has chosen not to disclose the funds it’ll be using. So instead, I’ll compare a cash yield with Wealthfront’s taxable fixed-income portfolio yields.
Last time I analyzed Wealthfront’s portfolios, on June 30, 2014, the weighted average yield to maturity in its 60 percent equity/40 percent fixed-income taxable portfolio was 3.21 percent. It’s probably slightly different now.
Schwab’s sample 60/40 portfolio had a 10.5 percent cash allocation.
Forgoing 3.21 percent on 10.5 percent of a portfolio would cost investors 0.33 percent per year. That’s hardly free, but it’s not the 0.75 percent that Raymond James estimated, either. Cash doesn’t pose interest-rate risk or credit risk, so it’s not an apples-to-apples comparison.
All told, Schwab’s use of cash will probably cost most investors between 0.20 and 0.40 percent per year. Wealthfront’s fees are at the low end of that range; Betterment is cheaper still for accounts over $100,000.
These fees are all super-low. And though every basis point counts, the difference in headline fees shouldn’t be anyone’s deciding factor, because, in the long run, asset allocation and ETF selection will prove a far bigger driver of overall returns. That’s a far bigger deal than any catfight.
Elisabeth Kashner keeps some cash in the bank. You should too. Contact her at [email protected].