Schwab Launches Intelligent Portfolios
RoboRiches News - March 9, 2015
Today, Schwab announced it has finally launched its much-anticpated Intelligent Portfolios. This new product is the first robo-advisory service to be offered without charging any advisory fees, commissions, or account service fees. For more details and analysis, please see our landing page here.

What is most intriguing about the service is its cost. Schwab Intelligent Portfolios is marketed as a free service. Why do they offer the service for "free"? It appears there are three main reasons:
  1. Feeder Program - If Schwab can retain and capture new assets with this free service, they can use it as a feeder program to upsell these clients in the future. In doing so, Schwab can invest in these smaller accounts now while hoping to make a profit on them later.
  2. Cash Sweep Accounts - Schwab discloses in its SEC filing the use of cash in an investment portfolio. Anywhere from 6%-30% of an accounts assets can be held in cash and allocated to a sweep program, alloing Schwab to generage interest income revenue off of these assets. Schwab discusses the role of cash in its portfolios here. 
  3. Fee Generating ETFs - Lastly, Schwab generates revenue from ETF fees charged on Schwab-owned ETF products (or from issuers that pay Schwab to use them). Not only are these fees funnelled back to Schwab, they can also cost 3x the average Vanguard ETF. 

Wealthfront CEO Adam Nash came out today with a blog post comparing its services to that of Schwab. Adam discusses the potential downsides to these new products as mentioned above. 

Our take
While it may appear that this approach to free robo-advisory is noble, you can see the profit motive behind it all. While making a profit isn't a bad thing (we of course encourange capitalism), we are skeptical of the means in which Schwab is generating its profits. We would argue that adding costly smart beta ETFs that merely increase fees would not be in the best interest of the client. Furthermore, we would take issue with the potentially large allocation of cash within a clients portfolio that also might not be in the clients best interest. 

While we remain skeptical, we will trial the new product shortly. Please stay tuned for further details. 

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