A petty fight broke out this week between Charles Schwab, Wealthfront, and Betterment over whose cash was better. The issue came about when Schwab opened its own free robo-advisor platform of automated portfolios with a small cash allocation. I guess Wealthfront and Betterment figured the best way to combat this is to make “free” look like a bad thing.
It was only a matter of time before the bigger brokerages offered a competing service. What’s funny is all three services basically have cash allocations to some degree. Hell, every brokerage account does.
Cash in my TD Ameritrade accounts sit in a money market fund until I decide to buy a stock or index fund. It’s not actual cash sitting in a mattress somewhere not earning interest. It’s a measily interest today, but it won’t stay that way forever. I think we can all remember when savings and money market accounts paid much higher interest rates in the past. We’ll eventually see those days again.
Betterment’s portfolio holds a portion in a short term Treasury Bond ETF (Betterment actually says the ETF is a cash alternative). Wealthfront does too, though, its through a Total Bond Market ETF.
The problem with Betterment’s and Wealthfront’s cash allocation is that both come with a fee attached. Basically, their customers are charged to earn interest on the cash allocation. Schwab drops the fee.
Now, there are benefits to using cash in a portfolio, mainly tactical – when an opportunity arises. Your typical robo-advisor portfolio is not tactical, its buy and hold with regular rebalancing. Cash isn’t as important in that regard, but low costs are.
You can argue the merits of how big or small (or not at all) the cash allocation should be in a portfolio or Schwab’s potential conflict of interest since the cash sits in a Schwab bank account to be lent out at Schwab’s benefit. But it’s hard to argue with avoiding fees.
Investing costs have never been lower for the average investor. You can pay index fund fees of a nickel to a dime for every $100 invested to match the market’s returns or you can pay 10x to 20x that, and sometimes more, for a managed fund hoping to beat the market.
Robo-advisors charge a small fraction of a percent to manage your money. And most discount brokers are quickly moving toward a free, or nearly free, investing experience too.
Who knows, maybe we’ll reach a point in the future where the only cost to investing is bad behavior. The service that solves that problem in a low cost way will probably win out.
So this silly fight between robo-advisors is splitting hairs. Investors are better off with several choices of nearly free automated portfolio platforms. And more competition is on the way.
Last Call
- Bill Bernstein: Rule No. 1 Is Stick To Your Plan – ETF.com
- A Mystery in Hedge Fund Investing – C. Richards
- Is There a Next Jack Bogle? Not If You Ask Jack Bogle – Bloomberg
- Buy the Best Performing Stock Sector for 87 Years – Marketwatch
- Discipline Key To Success – L. Swedroe
- Market Timing for Value Investors – Arbor Investment Planner
- The Power of Not Knowing – Ray Dalio
- Debt’s Two Sides: Riches and Misery – NY Times
- Diversification Means Always Having To Say You’re Sorry – Investor’s Paradox
- Worried About Bond-Fund Risks? Get Ready to Sleuth Them Out – Morningstar
