Before Charles Schwab rolled out its new subscription-based digital Intelligent Portfolios Premium service for mass affluent investors, it introduced a simplified portfolio construction framework for advisors.
The so-called ABC framework combines cap-weighted, strategic beta and actively managed stock and bond allocations with a behavioral overlay. The allocations are designed “to encourage clients to stay invested through all types of markets” and “to provide easy-to-implement solutions” for advisors that are low cost and scalable, according to Schwab.
The framework is available to all advisors, including those who don’t use Schwab as a custodian, and it can be populated with ETFs, mutual funds and individual stocks and bonds, whatever an advisor chooses.
It starts with a cap-weighted allocation of primarily stock and bond index ETFs, consisting of domestic and foreign stocks and the U.S. aggregate bond, Treasury inflation-protected securities, known as TIPS, and short-term Treasury indexes with a smattering of a real estate investment trust ETF and cash, known as the Allocation A. This allocation has no downside protection or alpha and little or no tracking error for a very low cost, an average weighted expense ratio of 5 basis points when using Schwab ETFs.
Then a fundamental strategic beta allocation — Allocation B — is added for U.S. small- and large-cap stocks and for international large-cap and emerging market stocks. It has potential downside protection in certain markets and potential alpha but a higher tracking error and cost — an average weighted expense ratio of six to 12 basis points.
Next, an active allocation — Allocation C — is added for U.S. large- and small-cap stocks, international large-cap and emerging markets stocks and core bonds. This allocation seeks alpha and has potentially more downside protection than the other allocations as well as a higher cost and tracking error, both of which will vary based on the portfolio managers overseeing the active portion.
In all three portfolios, the asset mix is adjusted based on how aggressive or conservative the portfolio is, which in turn reflects a client’s risk tolerance and goals.
“It’s a very complex investment world and the more opaque you make it seem the more confused the end clients are. We’re trying to keep it simple,” said Jake Gilliam, head client portfolio strategist for multi-asset strategies at Charles Schwab and Co. “If you’re an advisor sitting across the table from a client, this can help them understand what’s happening in down markets.”
Schwab began a formal rollout of the framework in the first quarter and to date has had meetings with more than 50 advisory firms, which are in different stages of evaluation and implementation of the framework, according to a spokesman.
— Check out Why Schwab’s New Pricing Plan Is a Big Deal on ThinkAdvisor.