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Robo-Advisors and Cash Management

Investing Blog - JLFranklin Wealth Planning

There’s a new money management player in town. Its name is Robo Advisor.

The robo-advisor will assess your risk and invest your savings, usually for a fairly low fee. The robo-advisor may even do tax loss harvesting for you. But, like self-driving cars, robo-advisors have no judgement. They focus solely on steering your investments and ignore crucial aspects of financial planning, such as wealth protection, cash flow, and taxes. As such, they leave your life savings, goals, and future comfort at risk.

Schwab recently launched Intelligent Portfolios, a robo-advisor solution for retail investors. Adam Nash, CEO of robo-advisor Wealthfront, claims Schwab Intelligent Portfolios are free, in part, because of a large mandatory cash position. Schwab points to the fact that short-term markets can be volatile to defend its cash position. Schwab claims a cash position of 6%-10% in a diversified portfolio makes sense because “[t]he independent Registered Investment Advisors who custody at Schwab today hold that amount in client cash on average as well.”

The “average” cash position held in accounts of Schwab advisor clients is a relatively meaningless statistic, since many wealth managers do not use cash as an asset class. All cash we advise clients to hold is for reserves. For example, there’s the executive who sold stock options in February and holds a $500,000 tax reserve. Another client, newly retired, holds 18 months of cash to meet short-term needs. Many clients hold cash reserves in banks outside of Schwab, so their cash position at Schwab would be less than 1%. We advise clients to hold cash for short-term needs, so that a dip in the stock or bond market would not cause a loss of principal on those funds.

Robo-advisors may be ideal for those just starting to save and learn about investing. After all, the average portfolio size of a robo-advisor client is $20,000, with total assets averaging less than $100,000. Another important point is that none of these robo-advisors existed during the Great Recession of 2008-2009, when many terrified investors stayed put, thanks to compassionate human advisors who heard their concerns and talked them out of selling all of their holdings.

If you are mid-career, pre-retirement, or retired, you likely have some complexity in your situation that only a thoughtful and thorough financial planner can address. We constantly keep an eye on client portfolios but trade only when necessary to keep client asset allocation in balance. At least once a year, we do a deep dive into each client’s financial life and provide customized recommendations to address each financial planning area. Segregating cash reserves is just one piece of the intricate financial puzzle. Check out our Investing blog for more information about our investment philosophy, and read our other blog posts for helpful tips on how to secure your financial future.

Each of our clients holds about 12,000 stocks from around the world, concentrated in less than 15 mutual funds. In addition to this diversification, our simple and elegant portfolios are super tax-efficient because we use a “tax location” strategy. Each client account—whether tax-deferred, tax-free, or fully taxable, and regardless of size—looks different. It takes a lot of time to thoughtfully manage portfolios this way, and we are confident that doing so is the best, most-effective approach.

Creating wealth is not easy. As the personal CFO for our clients, we make investment and financial planning recommendations as we see opportunities. Thoughtful, rational strategies—no matter how small—implemented over time can help our clients steer clearly down the road toward their long-term goals.

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Preserving the Wealth of Successful High-Tech Community Members
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The BE WISE Planning Strategy
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The BE WISE Planning Strategy
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