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.