47 0 0 0 13 6. A new group of financial websites has been making investment advice cheaper and cheaper. Now the brokerage and mutual funds giant Charles Schwab is getting into the game, with a new online service called Intelligent Portfolios that can design a portfolio for you without charging any fee at all. We’ll get to the asterisk in a moment.
First, here’s why Schwab’s entry into online advice is such a big deal. They don’t let you talk to a person. The investment advice robo-advisers give isn’t terribly complicated. But for most people, that’s a good thing.
You typically end up in a handful of broadly diversified index funds, which you buy and hold for the long run. This service can be a simple entry point to investing for those who don’t know how or where to get started, and they can automate chores like annual rebalancing and adjusting your mix as you age. And yet, Schwab’s new version appears to undercut even the other robo-advisers’ slender fees by charging nothing. Does that make it a sure winner?
As with all such programs, you have to take a look under the hood. In addition to whatever investors pay for online financial advice, they also have to pay the fees of the underlying funds. Those are very cheap funds that usually charge less than 0. Schwab’s approach looks a little different. While Schwab is offering its investment strategy gratis, the company has said it plans to recommend some of its own funds, as well as third-party funds. Schwab hasn’t made clear specifically what ETFs it plans to use with Intelligent Portfolios. But a quick glance at the kinds of portfolios it recommends suggests that some of its underlying investment will be relatively costly.
Some investors think this type of index fund, which tends to tilt its weightings toward value-priced stocks, may outperform the market in the long-run. But fundamental index funds are pricier than plain-vanilla stock index funds, which simply hold stocks in proportion to their market value. Schwab’s fundamental large-company stock fund charges investors a fee of 0. Schwab also stands to earn money from investors’ cash positions, since they will be held in Schwab cash vehicles, which Schwab makes money on by collecting a spread between what it earns reinvesting the money and what it pays out to Schwab customers. The Schwab spokesman said that was typical for other types of accounts housed at Schwab. In the long run, Schwab’s new product may prove a convenient tool for some investors. But don’t assume you’re getting something for nothing.