A Personal Look At Schwab’s Robo Advisor

[Editor's Note: An earlier version of this story had errors in the second chart. A corrected version of the chart is below. We regret the errors.]

A few weeks ago, Schwab launched its version of a robo advisor product branded as the Schwab Intelligent Portfolio. Unlike other robo advisors, such as Wealthfront and Betterment, Schwab charges no management fee.

I wanted to see what the portfolio of ETFs and cash would look like, but the only way I could figure it out for certain was to open an account and buy it. So I did just that with the minimum $5,000 investment. To minimize the significant amounts of cash earning virtually nothing, I did my best to choose the most aggressive portfolio I could for this small amount of money. However, Schwab spokesperson Michael Cianfrocca told me I had not chosen the most aggressive portfolio.

I'll reveal my specific portfolio in a bit, but here are some basic stats using a Morningstar tool to analyze. Also important to note is that the allocation below is as of a few weeks after the purchase, so the allocations may have slightly drifted. Finally, keep in mind that this is only one of the Schwab portfolios.

The portfolio had the following broad allocations. The 8 percent cash includes a bit of cash held by some of the underlying ETFs, so the pure cash was only about 7 percent.

As expected, the fundamental index funds used resulted in a heavy tilt toward small and midcap stocks and toward value.

Other interesting characteristics of the portfolio include:

• There were a total of 15 ETFs plus cash used to construct the portfolio.
• Schwab funds and cash held at Schwab represented about 82.4 percent of the value of the portfolio.
• Expenses averaged 0.27 percent and ranged from 0.04 to 0.48 percent annually.
• The 10 percent of the portfolio located in bonds was in lower credit quality, though the Local Currency Bond was technically investment grade at BBB-. Of note, however, is that I tried to choose the most aggressive allocation, and more conservative allocations may have higher quality bonds.

The full lineup is as follows:

My Take

Though I like the fact that Schwab does not charge a management fee, this doesn't make it a free portfolio, as Cianfrocca was quick to point out.

Because there is no expense ratio on the cash, Schwab stated the overall expense ratio is only 0.244 percent, or $12.20, for my $5,000 initial investment. I look at it a bit differently. While I agree with Schwab that cash can be an asset class, I also agree with Adam Nash, chief executive officer of Wealthfront, that cash can be a drag on performance.

Considering I can earn 1.05 percent on cash at Synchrony Bank, I adjust the 0.97 percent earnings differential (opportunity cost) to estimate costs of 0.32 percent. I keep virtually no cash, and instead choose to keep "near cash" yielding 2.25 percent, with only a 1.12 percent early withdrawal penalty. Obviously, less aggressive portfolios would have larger adjustments, as they hold more cash.

A Wealthfront Comparison

By comparison, according to Mr. Nash, the average Wealthfront portfolio has an expense ratio of about 0.15 percent. Add an additional 0.25 percent management fee (for larger portfolios), and the total costs are a bit higher, at 0.40 percent.

Nash stated that the average Wealthfront portfolio starts with about six or seven ETFs and does not have the small-cap/value tilt. Finally, he confirmed Wealthfront has no cash drag and added that Wealthfront maximizes tax efficiency by using asset location (different allocations with different tax wrappers), tax-loss harvesting at lower asset levels, and even tax loss harvesting with individual stocks built to approximate an index. They call this "direct indexing."

While I have built my entire portfolio to have a slight small-cap value tilt, I have chosen to do it with small-cap Vanguard index funds to keep fees lower and tax efficiency higher. I'm more of a dumb beta guy who recognizes that small-cap and value factors are compensation for taking on more risk.

Finally, the Schwab Intelligent Portfolio has funds I'd never dream of investing in, such as the Market Vectors EM Local Currency bond Fund (EMLC | C-57). With an expense ratio of 0.47 percent, I suspect this will move more with foreign currency changes than the bond market. I asked Schwab for the reasoning to include this fund, but have so far not received a response.

Staying The Course

That said, I'm going to leave my little Schwab Intelligent Portfolio going for a while. It gives me access to a low-cost small value tilt.

The only thing I don't like about robo advisors is the term "robo advisors," which I think is a bit derogatory. Whether it's Schwab, Wealthfront, Betterment or most others, these software-based portfolio managers virtually eliminate the emotions that human portfolio managers have, and give access to tax-efficient, low-cost diversification.

At the time this article was written, the author owned positions in all of the securities mentioned—and in the amounts enumerated in the table above. Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning Magazine.