In the article, it states that Chase is offering 0% funds, yet Betterment claims that their "All-in Actual Cost" for a 100k fund is better than Chase's due to cash drag and a lower expense ratio. (Found here: https://www.betterment.com/comparison/schwab-intelligent-por...)
This is confusing and hard to fact check. Who do I believe?
I think their reasoning is sound in theory, but it strikes me as suspect that they would not allow even the option to stay fully invested for clients who would prefer to manage the cash component of their portfolio in a bank account where it can actually be spent at moments notice. And it does also strike me as a bit too convenient that their decision to remove this option from clients just happens to directly benefit Schwab's bottom line.
Their decision to compose more than half of the equity portion of their portfolio using dramatically higher-cost fundamentals ETFs from Schwab in place of using solely market cap ETFs also triggers similar warning bells for me, however sound the technical reasons for doing so might be:
https://intelligent.schwab.com/public/intelligent/insights/w...
That said, I'm curious how Betterment came up with their numbers for their cash drag analysis. If cash drag on the highest end of the spectrum of a portfolio with 30% in cash is supposed to cost investors 0.56%, I'm not sure how they derived the lowest end of a portfolio with 6% in cash to be 0.38%. It seems to me Schwab might not be the only one here guilty of misleading potential clients.
Disclaimer: I am a Schwab client, but am not actively using their Intelligent Portfolios offering. I have done a bit of research into it back when it was announced though.
I used to work with a lot of these custodians. They typically make ~40+% of their revenue from cash products.
They'll keep you in some fund paying 1 bps and turn around and invest it elsewhere. Yes, you want some cash (esp. to the extent it's part of your asset allocation), but no you don't want to use the awful sweep vehicles they default you to.
I use Schwab for checking and like their free ATMs feature. Thought about using their Intelligent portfolios but I didn't like the higher-cost ETFs and the mandatory cash component. Decided to go with Wealthfront. Keep my cash that's not invested in a 1% yield savings account with Ally bank.
I am also moving from Betterment to Vanguard. I like Vanguard's selection of funds better than Betterment's one-size-fits-all option.
For example I am a cautious investor right now. At Betterment this means I have to lean more towards their Bonds option, which yielded a very low return over the past year. At Vanguard, I can invest in the Income fund which is a mix of high dividend paying stocks and bonds. Still cautious but much better returns.
You'll get more fine grained tax management, e.g., tax-loss harvesting if using something like Wealthfront. You can't pass along these individual losses (and net against other gains/carry over to future years) with a target date fund.
I actually use Vanguard target date for my tax-advantaged accounts, but I use Wealthfront for taxable account.
The one advantage with these robo advisors, or any broker for that matter, compared to a mutual fund is tax loss harvesting.
By having a separately managed account of ETFs or stocks, you can sell and exchange similar stocks when they lose value and harvest the tax losses to use at a later date.
Could you explain a bit more? Are you making a better ROI? I currently have a Betterment account and would consider switching if there's a good reason.
Index-based robo-advisors generally invest your money in vanguard, ishares, schwab broad-market etfs, which come with their own fees (industry-lowest). The expense ratio is the accumulation of all those fees. To check the accuracy of the claim, you would need to find the specific instruments each company invests in, at what proportions, and add up their fees.
Cash drag is the penalty you pay for the time and amount of your wealth that is spent in sub-productive, inflationary cash. The article states:
"Schwab allocates up to 30% of a portfolio to cash. In certain circumstances, keeping up to 30% in uninvested cash can result in up to a 0.56% annual return penalty"
This sounds like a worst case scenario. To roughly calculate cash drag, you can take the avg percentage of wealth that will be in cash throughout the year, then multiply by 5% rule of thumb avg returns. For example if you had to keep 10% in cash, that would be 0.1 * 0.05 = 0.5% in lost potential earnings due to cash.
Cash has some benefit too. I usually keep a reserve of cash that I float and use to rebalance based on market conditions due to trading restrictions that make dollar cost averaging harder.
lewisl9029|9 years ago
I think their reasoning is sound in theory, but it strikes me as suspect that they would not allow even the option to stay fully invested for clients who would prefer to manage the cash component of their portfolio in a bank account where it can actually be spent at moments notice. And it does also strike me as a bit too convenient that their decision to remove this option from clients just happens to directly benefit Schwab's bottom line.
Their decision to compose more than half of the equity portion of their portfolio using dramatically higher-cost fundamentals ETFs from Schwab in place of using solely market cap ETFs also triggers similar warning bells for me, however sound the technical reasons for doing so might be: https://intelligent.schwab.com/public/intelligent/insights/w...
That said, I'm curious how Betterment came up with their numbers for their cash drag analysis. If cash drag on the highest end of the spectrum of a portfolio with 30% in cash is supposed to cost investors 0.56%, I'm not sure how they derived the lowest end of a portfolio with 6% in cash to be 0.38%. It seems to me Schwab might not be the only one here guilty of misleading potential clients.
Disclaimer: I am a Schwab client, but am not actively using their Intelligent Portfolios offering. I have done a bit of research into it back when it was announced though.
prdonahue|9 years ago
They'll keep you in some fund paying 1 bps and turn around and invest it elsewhere. Yes, you want some cash (esp. to the extent it's part of your asset allocation), but no you don't want to use the awful sweep vehicles they default you to.
KyleJune|9 years ago
toomuchtodo|9 years ago
Vanguard is a mutual company; they exist for the benefit of their users. Hard to compete against that.
Disclaimer: moved from Betterment to Vanguard
caleblloyd|9 years ago
For example I am a cautious investor right now. At Betterment this means I have to lean more towards their Bonds option, which yielded a very low return over the past year. At Vanguard, I can invest in the Income fund which is a mix of high dividend paying stocks and bonds. Still cautious but much better returns.
prdonahue|9 years ago
I actually use Vanguard target date for my tax-advantaged accounts, but I use Wealthfront for taxable account.
yunong|9 years ago
By having a separately managed account of ETFs or stocks, you can sell and exchange similar stocks when they lose value and harvest the tax losses to use at a later date.
Ductapemaster|9 years ago
axxl|9 years ago
Edit: looked it up, the 2050 is 0.16%, not bad. I usually see much higher fees on those target date funds.
thinkloop|9 years ago
Cash drag is the penalty you pay for the time and amount of your wealth that is spent in sub-productive, inflationary cash. The article states:
"Schwab allocates up to 30% of a portfolio to cash. In certain circumstances, keeping up to 30% in uninvested cash can result in up to a 0.56% annual return penalty"
This sounds like a worst case scenario. To roughly calculate cash drag, you can take the avg percentage of wealth that will be in cash throughout the year, then multiply by 5% rule of thumb avg returns. For example if you had to keep 10% in cash, that would be 0.1 * 0.05 = 0.5% in lost potential earnings due to cash.
Spooky23|9 years ago
walshemj|9 years ago
deelowe|9 years ago