Updates to Schwab Institutional Intelligent Portfolios Limited Fund Selection

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Currently, many of the accounts in our Do-It-Yourself Service Level utilize the Schwab Institutional Intelligent Portfolio (IIP) technology for regularly trading in client accounts. For accounts using the IIP technology, the list of fund choices is extensive, but not unlimited.

In 2019, we started switching our iShares country-specific funds to equivalent but cheaper Franklin Templeton country-specific funds for our managed portfolios and retirement plans.

These fund swaps were for Australia (EWA to FLAU), Canada (EWC to FLCA), Hong Kong (EWH to FLHK), Great Britain (EWU to FLGB), and Switzerland (EWL to FLSW).

On paper, we expected that the advantage of Franklin Templeton over iShares would be 0.41% and during 2021 the estimated advantage of Franklin funds over iShares was 0.40%.

Unfortunately, we were not able to add these funds to our Schwab IIP hosted accounts right away.

Schwab limits possible exchange-traded funds (ETFs) on the program to only a few thousand. They add new funds during a semi-annual rebalance which, in our experience, doesn’t always catch all the funds which meet the criteria.

As you can read from Schwab’s recent Frequently Asked Questions entry:

How were the ETFs and mutual funds that are available on the platform chosen?

Institutional Intelligent Portfolios® lets advisors choose from a range of more than 1,300 eligible ETFs and 2,700 mutual funds to create customized investment portfolios for clients.

For inclusion in the Institutional Intelligent Portfolios® platform, funds are required to meet the following criteria:

ETFs Mutual funds
  • At least $20 million in assets.
  • At least $40 million in assets.
  • No purchase minimum; willing to waive the purchase minimum for advisors at Schwab.
  • Must be available in all states.
  • The fund or their affiliates pay Schwab for recordkeeping, shareholder, and other administrative services that we provide.

Funds that will not be available on the platform:

  • Interval funds
  • Mutual funds that require special handling, limit purchases to Subsequent or Redemption Only, enforce an Automated Trade Restriction Policy, or limit purchases to Retirement Plans
  • Funds that are closed to the public, have early cut-off times, or have alternate settlement windows
  • Funds with 12b-1 fees

Institutional Intelligent Portfolios Product Management reviews ETFs and mutual funds semi-annually according to the platform selection criteria.

We believe that freedom investing is worthwhile even if the only options have expense ratios of 0.47%. As a result, we continued to use the iShares funds within the IIP program while they were the only choices available for those countries.

However, now that the Franklin Templeton funds have been added to the Institutional Intelligent Portfolios platform, we are updating our allocations to use the cheaper funds as their primary targets.

Before these changes, Marotta’s portfolios within the Schwab IIP program have had average expense ratios of 0.24% or less. We expect that after this change, the average expense ratio of portfolios will be closer to 0.17%.

The average expense ratios of pay-to-play commission-based advisors like Ameriprise are 0.79%.

Saving 0.54% to 0.62% in expense ratios pays for more than the 0.4% fee we charge for accounts within our Do-It-Yourself Service Level.

The hidden fees of commission-based advisors are not always obvious to clients. Neither are the savings produced by careful fund selection by the Marotta Investment Committee.

Photo by Retha Ferguson from Pexels

Follow Megan Russell:

Chief Operating Officer, 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 700 financial articles. Her most popular post is "The Complete Guide to Your Washing Machine" while one of her favorites is "Funding a 3-Year-Old’s Roth IRA."

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.