Recently after reading our article “The Pros and Cons of a Marotta-Managed Schwab Institutional Intelligent Portfolios,” a subscriber suggested that we were too carefully listing the cons and not explaining the benefits of our use of Institutional Intelligent Portfolios. Additionally, they suggested that we did not explain how our use of the Institutional Intelligent Portfolio technology differs from Schwab’s use of the Intelligent Portfolio Service.

We strongly recommend that clients do not allow their financial advisor to have custody of their assets in anything but the limited ability to make trades on your behalf, move money between your accounts, and take out a fee. Marotta Wealth Management does not maintain custody of the assets we manage. Instead, client assets are housed at a qualified custodian. We use and often recommend Charles Schwab as the qualified custodian.

One job of a custodian is to provide access to a wide array of investment choices, an integrated technology platform for trading and record keeping, and basic independent account statement reporting. These are all neutral services that simply offer a structure on which you can implement your investment philosophy. For this reason, many different advisors custody assets with Schwab each using a different investment philosophy.

Our use of the Institutional Intelligent Portfolio technology allows us to implement our investment philosophy and asset allocations across all of the portfolios in the program. We set and modify the investment mix and the program invests, trades and rebalances portfolios automatically. Our portfolio construction is periodically adjusted by our Investment Committee. Schwab’s technology execute trades at the discretion of our philosophy.

Any investment manager can use the Institutional Intelligent Portfolio technology to implement extremely different investment philosophies.

Charles Schwab offers Intelligent Portfolios run by their own in-house retail team. These accounts invest in all their own Schwab-managed funds (like a commission-based advisor might). This makes them very different from us in several ways.

1. We are an Independent Advisor.

Schwab has always had financial planning and investment management services that directly compete with the advisors who choose to use Schwab as their custodian. Rule number one in how to Safeguard Your Money is “Do Not Allow Your Advisor to Have Custody of Your Investments.” We believe that having an independent advisor acting as a fiduciary gives you extra layers of accountability and oversight. Even as much as we like Schwab as a custodian, Schwab has little incentive to avoid choices which make them money. And these choices may not be in your best interests.

2. We set a smaller cash allocation.

Under Schwab’s retail service, they have an average cash balance of 7% to 9% of the portfolio with cash balances ranging from a minimum of 6% up to a maximum of 30% of the total portfolio. They market, “We believe cash is a key component of an investment portfolio.” However, having a cash balance is also one of the ways that Schwab makes money from the program. The cash position is a Scwhab-run money-market fund, and Schwab is quietly paid by the expense ratio on that fund.

In the Institutional version of Intelligent Portfolios, Schwab requires that just 4% be kept in cash. We wish that there was no cash requirement. As a result, we set your cash balance as low as possible and believe that having a lower cash balance requirement is better for you.

3. We construct a portfolio based on your withdrawal needs. (Schwab uses risk tolerance.)

Schwab selects portfolio targets for you after asking a series of questions. Under Schwab’s guidance, any expression of doubt, insecurity or lack of investment knowledge reduces your stock percentage. The questionnaire is a mere risk tolerance assessment. Risk tolerance questionnaires are popular in the financial services industry, but they are ultimately useless.

Your goals matter while your risk tolerance must be overcome. Ultimately, we believe that Schwab’s portfolio construction methodology results in portfolios that are too heavily weighted toward cash and bonds and therefore won’t give you the best chance of meeting your goals.

As of writing this article, Schwab has promised to upgrade the technology to allow us to write our own questionnaire from which we can set asset allocations. However, they have not implemented this upgrade yet. Regardless, we are working directly with our “Do-It-Yourself” clients to create priceless asset allocations based on the client’s specific withdrawal needs.

4. We construct a low-cost diversified portfolio based on our investment philosophy. (Schwab uses Schwab-selected funds.)

Each advisor on the platform builds portfolios based on their specific investment methodology. Since the platform has thousands of funds from which to choose, the portfolios you receive will reflect your advisor’s specific investment philosophy. Our portfolio construction methodology includes tilting small and value as well as investing in the countries with the most economic freedom and investing in resource stocks to help hedge against inflation.

5. We dynamically tilt our allocations monthly. (Schwab is static.)

When Schwab runs the portfolios, they use a static target asset allocation without changing it. In contrast, we adjust our portfolio asset allocation targets on a monthly basis based on a dynamic asset allocation that we believe can boost returns over long periods of time.

6. We offer timely financial advice and guides.

Included in our “Do-It-Yourself” service, we enroll you in an exclusive newsletter with reminders and guides for important financial planning decisions. Our hope and intention is that the do-it-yourself program will enable subscribers to do it themselves without incurring any additional costs.

7. We offer more planning services.

While our hope is that investors will be able to follow our instructions on their own, if subscribers need it, help is available. After investors have been enrolled in the program for at least three months, they may shop and select any of the Bonus Services for an additional planning fee. We will gather the necessary information and deliver any relevant reports to you via our secure client portal.

We hope that this Service Level will help open fiduciary investment management to a greater number of consumers.

If you are interested in this service, becoming part of Marotta’s Do-It-Yourself program is as simple as following these instructions and signing up online.

Photo by Markus Spiske on Unsplash