Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, August 5, 2019. You can also find the re-balance calendar for 2019 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Surprise! Brokerages Make Most From Your Cash, Not Commissions

We have long pointed out that investors have ignored one of the simplest, no-risk ‘free lunches’: enhanced cash returns. In this newsletter, we want to dive in a bit deeper to further illustrate this point. 

Meager cash returns from banks

Of course, we have regularly pointed out that investors and savers have lost out substantially from their bank deposits. The following is one example newsletter we wrote recently: November 12, 2018: The Staggering Low Interest Rates From Big Banks. At this moment, even after Treasury Bills (T Bills, i.e. Treasury debt matured in 3 months) have been paying 2.21% (see this link, for example), major banks are still paying pittance: Bank of America: 0.03%, Chase: 0.01%, Wells Fargo: 0.01%. These banks can simply make more than 2%, the difference of interest from lending money to government and paying you. In fact, they can make more by lending to businesses and individuals that pay higher interests. 

In February 4, 2019: Cash And Money Market Funds: Interests And Safety, we also discussed that as a consumer, you can act like a bank by buying T Bills (thus, lending to government) to boost your returns. If you don’t want the hassle and restrictions, you can actually purchase a money market fund. A Federal money market fund is ‘almost’ as safe as cash (sans no FDIC insurance). At the moment, Vanguard Treasury Money Market Fund pays 2.22%! 

Your cash in brokerages

Less unknown is that, similar to banks,  brokerages actually make majority of their money from your cash (though we actually pointed out this in previous newsletters). As a pioneer and dominant discount brokerage firms, Schwab is one of the best brokerages that has reasonable customer services and low commission fees. Furthermore, Schwab is one of the largest robo advisors, providing ‘free’ asset allocation portfolios (called digital advisory) to its clients. Its stock has delivered a very good return to its shareholders. Recently, we happened to look at its latest quarter report. Here is what we found about its profit sources. 

From its Q1 2019 10-Q quarterly report, Schwab made $1,681 millions net interest revenue (after expenses) among $2,723 millions of its total revenue that include commission fees ($163 millions) and its own funds’ fees ($414 millions). The net interest revenue is about 62% of its total revenue!

From the above table, commissions only represented 6% of its total revenue, a very small percentage. 

Among $273 billions interest earning assets (mostly clients’ cash), it earned 2.92% and paid out 0.46% on average (annualized). This resulted in 2.46% profit margin – the earning (counted as net interest revenue) $1,681 millions in last quarter. 


Schwab’s no-fee (mostly intelligent portfolios or so called free robo advisor) asset was $66 billion in last quarter. The recommended portfolios usually allocate some not insignificant amount in cash. Based on its website, the cash allocated in these free portfolios earned 0.65% APY on average. Schwab further disclosed the following: 

Assume a $100,000 account with a 10% Cash Allocation ($10,000), which would be a moderate – aggressive investment portfolio allocation. Using market interest rates from the first quarter of 2019, Schwab Bank earned about 2.75% on an annual basis on the cash it invested net of what it paid to clients in the Program. Schwab Bank would have received about $275 on that cash deposit annualized. This is 0.275% or 27.5 basis points of the total client investment of $100,000. 

The above scenario is not extreme by any means. Thus one can safely say that Schwab probably makes more than 0.25% out of client investments, more than what’s charged by other popular robo advisors. 

This is just another illustration that the ‘free’ part is not really free. 

The above is by no means Schwab specific: most brokerages make substantial money by paying low interest rates to your cash there. It just happened to be clearly reported by Schwab (we applaud their transparency) . 

We would like to conclude the above discussion by reiterating that an investor and/or saver should not simply ignore cash. Though it might seem to be boring and low return, it can actually save you good amount of money that otherwise would have been made by some financial services such as brokerages. 

Market overview

S&P 500 made another record last week. Though the job report last week presented a rosier picture, based on this Bloomberg article, the employment index has fallen to a low since 2013 or so, depending on what indexes you are looking at. As we are now entering earnings report period, some of not so great fundamentals will show up. Given current elevated valuation and extended markets, we again reiterate staying the course and managing risk carefully. 

For more detailed asset trend scores, please refer to 360° Market Overview

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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