Overview

Robo-advisors are becoming all the rage these days as more and more brokers add this feature to their list of brokerage services. Robo advising platforms are popular among beginners and those who don’t have the time (or just don’t want to) become experts on investing because they provide a very basic portfolio management service at a low-cost. TD Ameritrade has recently jumped on this band wagon with their own portfolio management service – it’s called Essential Portfolios. We’ll cover it in this article and then help you decide if you should go the “robo route” or manage your own account.

What is TD Ameritrade’s Essential Portfolios?

Essential Portfolios is your standard robo-advisory service, although we feel it is bit more comprehensive than the same service provided by other brokers. Essential Portfolios is designed for the individual who wants to invest for their future or for a specific goal and wants to make sure their portfolio is optimized to help them get there but doesn’t have the time, expertise, or desire to manage it on their own.

How does it Work?

If you are familiar with other robo-advisor services, Essential Portfolios follows the same basic framework where TD Ameritrade will ask you a series of questions about your personal financial situation, goals, and your risk appetite. For example, they will need to know how much you plan on investing, what goal(s) you’re investing for, what your time horizon is, and if you anticipate any major life events that will require you to redeem some of your portfolio before you reach the specified goals. We found that TD Ameritrade asked more questions than most brokers with a similar service, which makes us feel that their portfolio generation process is more tailored to the individual’s situation.


Ameritrade essential portfolios


Portfolio Recommendation

Once you finish with the questions, Ameritrade will ask you to choose the level of risk you are comfortable with, and will also show you the average expected annual return and volatility of returns in a portfolio with each risk level (higher expected return = higher volatility). After selecting your desired risk, the Essential Portfolios algorithm will churn away at all your responses and recommend an ideal portfolio for your situation and goals.

Based on our answers and our preference for moderate risk, Ameritrade recommended the below Moderate Growth Portfolio. This portfolio offers a good variety of asset classes and strategies, including more modest exposures to what have been historically considered the riskiest asset classes – Emerging and International Equities. It tells us the average expected annual return is 4.99%, and the cost to us is 0.30% a year, which we’ll discuss next.


Ameritrade essential portfolios


How is My Portfolio Constructed?

Assuming you are happy with the portfolio and allocations that Ameritrade recommended for you, Ameritrade’s AI will then go ahead and construct your optimized portfolio using low-cost ETFs from Vanguard and Back Rock to achieve your target exposures. Part of the reason Ameritrade uses these ETF providers is that they are not only some of the best and most popular ETFs on the market, but they also have the lowest expense ratios – generally around 0.06%.

It’s important to note that your Essential Portfolio will only invest in ETFs, so to the extent that you would like to include a large weight in a specific company that you like you will have to do this outside of the Essential Portfolios AI. You can do this directly in your TD Ameritrade brokerage account.

Rebalancing and Automatic Investing

Another attractive aspect of Essential Portfolios is that Ameritrade will automatically rebalance your portfolio to keep it in line with its target asset allocations. Additionally, you have the option to setup recurring deposits into your account that Ameritrade will invest in the portfolio for you. Your essential portfolio is essentially moving along on cruise control while you can sit back and check in to monitor its performance as often or as little as you want.

What does Essential Portfolios Cost?

TD Ameritrade charges a flat 0.30% annual advisory fee for using Essential Portfolios to manage your account. This is fairly average, if not a bit low, when compared to similar products with other brokers. It’s important to note that this 0.30% advisory fee doesn’t include the expense ratios of the ETFs (but as we mentioned, these are pretty low). There is also a $25,000 minimum required investment to use Essential Portfolios.

Investors Who Would Benefit Most from Essential Portfolios

In general, Essential Portfolios is often a great option for beginners who are just getting their feet wet in the market or those who want to start investing but don’t want to be knee deep in the weeds so to speak. It’s great for beginners because it teaches them how to tailor their portfolio toward their unique situation and goals. Beginners will get exposed to different asset allocation mixes and see how risky assets are combined with less risky ones in order to optimize their risk/return scenario.

Another group of people who may be lifelong Essential Portfolio clients are those who have money they want to invest for a certain goal but are not the least bit interested in (or simply don’t have the time) learning about investing and the different asset classes. This service is great for them because it allows them to save and invest toward their goals while leaving the portfolio construction and maintenance to Ameritrade’s AI.

When a Standard Ameritrade Account is the Better Option

After reading about Essential Portfolios, you may be thinking it’s too plain and simple for you - too boring. If you have experience investing, have a natural interest in learning and reading up on the financial markets, and want a more complex or customizable portfolio, Essential Portfolios may not be a good fit for you. If you want to hand-pick specific individual stocks, ETFs, or mutual funds and/or implement tailored bets involving options or other securities, we would recommend a standard TD Ameritrade account.

With a standard account, there is no advisory fee or minimum required, but you will pay a modest commission for most transactions (some ETFs and mutual funds are commission-free). There is also no automatic rebalancing or portfolio allocation recommendations from Ameritrade, but this is a small tradeoff for the ability to build your portfolio however you want. With a standard Ameritrade account, you can choose from hundreds of thousands of stocks, ETFs, bonds, mutual funds, options, futures, and currency contracts.

You can research individual companies and buy or sell as much or as little as you want in your portfolio, whenever you want – there are no limits. This “do it yourself” approach to investing is without a doubt more time consuming, but if you have a passion for investing it will be an exciting experience rather than a “chore”.

Summary

In summary, TD Ameritrade’s Essential Portfolios service is one of the stronger robo-advisors that we’ve seen offered by a broker. If you are a beginner to investing or someone who wants to invest but doesn’t have the time or desire to learn about the markets, we’d recommend using the service. If you are an experienced investor who loves reading about the financial markets and is excited about building their optimal portfolio, we’d recommend a standard TD Ameritrade account.

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