Automated Investment Portfolio Management Goes Mainstream

Discount brokerage firm Charles Schwab has announced that it will soon start a new free automated investment advisor service, “Schwab Intelligent Portfolios.”

The Finance Buff is covering the topic:

Like the other so-called robo-advisors such as Betterment and Wealthfront, Schwab’s computer algorithm is going to suggest and manage a portfolio of ETFs for you. The minimum is only $5,000. You can have IRA and taxable accounts. You can fund the account with recurring deposits. It’s going to be automatically rebalanced. Once you have $50,000 or more, you also get automated tax loss harvesting.

The big difference is that Schwab’s service is going to be FREE: no trading commission, no advisory fee, no service fee. You just pay the normal expense ratios on the underlying ETFs. And it comes with Schwab’s brand name and its customer service.

All of these firms are using modern portfolio theory and behavioral asset management techniques to design customized asset allocations for individual investors.

What’s noteworthy is that Schwab is a mainstream retail brokerage house, not an online startup.  Plus their service will be free (Betterment and Wealthfront aren’t free, but they do charge relatively modest fees).  Will this mark the beginning of widespread automated investment management for the retail investor?  If the experience of Bettement and Wealthfront is any guide, yes. Betterment was founded in 2008 and now has $800 million in assets under management, while Wealthfront “grew from nothing to $1 billion in 2-1/2 years“.  Lots of investors are fearful of making investment mistakes, and this is one way to make sure your portfolio is managed in a professional, unbiased way.  Of course it should be pointed out that if an algorithm can manage your portfolio, so can you.  But for many retail investors — those who feel they aren’t knowledgeable or disciplined enough — these services will be popular.

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