The Pros and Cons of a Marotta-Managed Schwab Institutional Intelligent Portfolios

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In 2015, Schwab came out with Schwab Intelligent Portfolios, and we were fairly critical of them. They use a mere risk tolerance assessment to create your asset allocation, blindly harvest capital gains, and fail to provide any financial planning, even a Cash Flow Analysis.

Recently, Schwab started offering what they call “Schwab Institutional Intelligent Portfolios” or IIP. These are advisor-managed robo-investing accounts. They allow advisors like us to design your investment strategy, manage your accounts, and have trades made by computer algorithm instead of by our hand.

Because it is Marotta-managed, we will be able to establish the questionnaire that designs your asset allocation (promised in a Schwab upgrade they have yet to fulfill). This means that, instead of Schwab’s risk tolerance questionnaire, we can set up our age-appropriate asset allocations, like our gone-fishing portfolios, based on withdrawal rates to help set a priceless asset allocation for you. And, although the rebalancing algorithm still has its flaws, we are able to provide financial planning services alongside the robo-investing, giving you a fuller service.

That being said, there are still several cons which should be considered when deciding between a Marotta-managed robo-investing account or a traditional Marotta-managed-and-invested account. Here are the Pros and Cons as I see them:


Algorithm Lacks Knowledge of the Client: To be as good as a human advisor, specific tax consequences (or lack of them) as well as upcoming withdrawals or contributions on the account must be considered while rebalancing. Without this information, a robotic rebalance could create the errors that a human is likely to avoid. For example, the algorithm might invest all available cash just days before the client needs a withdrawal, sell funds to generate cash just days before a contribution, generate capital gains taxes unnecessarily by selling a highly appreciated security, or fail to purposefully realize capital gains while the client is in a lower tax bracket. Sadly, even having humans overseeing the IIP cannot override this flaw.

Forces Your Security Selections: Schwab limits the investments to a finite list of exchange traded funds (ETFs). They count the effort of curating those funds as a benefit, but in the process they may eliminate the option of better performing securities with lower expense ratios. Currently Schwab’s selection includes about 1,400 ETFs. There are a few ETFs on our list of curated funds for purchasing which are missing from Schwab’s list. That being said, by the end of 2018, Schwab has plans to nearly triple the number of funds included in the program, and we look forward to seeing if they add any more of our Buy List funds.

Forces 4% Cash: Schwab, in order to get paid for the service they offer, requires 4% of each account remain in cash. The cash position is a Scwhab-run money-market fund. Schwab is quietly paid by the expense ratio on that fund. Staying fully invested in the markets can have a large benefit over time. Having 4% in cash could cost you more than if they just charged a small fee on the account.

Cons for taxable accounts only

Requires a Liquidated Portfolio: Robo-investing simplifies some of the automation problems by requiring every client to begin all in cash. This common practice among robo-investing (and some human ones) simplifies rebalancing. However, asking clients to liquidate their assets can generate capital gains when selling appreciated positions. That being said, the Schwab program may mitigate these liquidation costs in two way. If any positions match selected funds in the target allocation, Schwab will keep them for the new investment strategy and won’t automatically sell them. And for all the positions which are sold, Schwab does not charge a transaction fee for the sale.

Blindly Harvests Capital Gains: The first two steps of the rebalancing algorithm are to sell funds with a loss and to sell funds that have sufficiently drifted above the target allocation. The problem with this is that the algorithm doesn’t factor capital gains, only capital loss. Thus, the strategy will likely generate capital gains tax by selling funds above the target allocation without heeding the tax consequences. Although it is unfortunate that capital gains may be blindly realized, the math suggests that the benefits of rebalancing may outweigh the cost of capital gains.

Ignores Charitable Giving: When clients are charitably inclined, highly appreciated holdings that put the portfolio over its target allocation can be used to gift to their favorite charity while the cash they would have gifted can be placed in their portfolio instead to aid in rebalancing. The robo-rebalancing algorithm eliminates this opportunity.


Real-time Dynamic Tilt: While our managed portfolios need to wait to have one of our traders implement our dynamic tilt in their portfolio, we can update the investment management direction of the robo-investor to our new dynamic tilt numbers and, the next day, have it implemented in your portfolio’s algorithm. This provides the opportunity to boost returns.

No Transaction Fee: The Schwab Institutional transaction fee for normal ETFs is $4.95 per trade regardless of the size of the trade. To minimize costs, this means that rather than investing as there is free cash, we try to wait until the transaction fee is 0.3% or less (preferably less than 0.1%) of the purchase. For purchases in ETFs with transaction fees, this means either waiting until the purchase is $1,650, $4,950, or more or purchasing something else without a fee. Schwab IIP accounts, however, offer a finite list of ETFs but all of them have no transaction fee. This means that they can invest even as little as $100 without having to incur a trading fee. Staying fully invested in the markets can have a large benefit over time. This Pro must be weighed against the above Con of “Forces 4% Cash.” If 4% of your account is greater than $4,950 or, in other words, if your account is larger than $123,750, then this Pro isn’t really worth as much to you. If your account is larger than $123,750, the 4% cash will tend to keep more in cash than a human trader would. However, for smaller accounts, not having a transaction fee means that you can stay more fully invested or diversified.

Better than Gone-Fishing: We are very happy to offer our Marotta’s Gone-Fishing Portfolios completely free here on our blog. However, these portfolios are specifically designed to be just a few stocks which should weather the ups and downs of the market fairly well while only rebalancing twice a year. Our gone-fishing portfolio does not have our dynamic tilt and is (probably) not rebalanced regularly. Thus, there is an opportunity to boost returns by switching to a Marotta-managed Schwab IIP account from the Gone-Fishing Portfolio.

Access to Investment Management: Not everyone who wants or would benefit from our services can meet our minimum fees. Those fees are there to cover the cost of the manual trading, bespoke financial planning services, and comprehensive wealth management that we offer. However, with a robo-investing program doing the trading, we are able to provide investment management services at a lower cost to ourselves and thus a lower cost to those clients. With a lower minimum fee, more people are able to sign up as clients.

Pros for taxable accounts only

Harvests Capital Losses: Realistically, a human trader can only look for losses in your portfolio so often. A robo-investing algorithm however can look daily. Schwab IIP offers tax-loss harvesting as a portion of their rebalancing algorithm. The service requires a $50,000 minimum investment but could save the client when it comes to their tax bill.


The robo-investing accounts are not beneficial to everyone. Although the immediate implementation of the dynamic tilt may be beneficial for all, the 4% that is forced to remain in cash, the requirement that you liquidate before you can begin, and the chance of realizing excessive capital gains are especially detrimental for high-net-worth veteran investors.

That being said, I think the Marotta-managed robo-investing accounts are the best deal for investors with less than $123,750 in each account who are either in the 0% capital gains bracket or do not have much gains in their taxable account. This might be, for example, investors with a net worth of $371,250 because they have $123,750 in a joint taxable account as well as his and her Roth IRA.

The benefit breaks down like this:

For those of you who have not yet invested, you would get access to our smart Portfolio Management and Asset Allocation Design in a very low-cost account.

For those of you who are using the Gone Fishing Portfolios, you would gain access to regular rebalancing and the dynamic tilt.

For those of you who are currently clients below our minimums, we would be able to keep you more fully invested (because there would not be a transaction fee) and implement the dynamic tilt faster in your portfolios while lowering your quarterly fee.

All of these pros should boost returns, making it a better service for these beginner investors.

Although these accounts could be used with higher-net-worth individuals, the more money that is being invested the more that the forced 4% cash hurts returns and drags down any other benefits.

Photo by Brandon Mowinkel on Unsplash

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.