6/19/2013 6:15 PM ET|
Investing sites give planners a run for their money
Web services aim to automate personal finance decisions, saving you from yourself.
Joe Giuliano knows what he's supposed to do with his investments. The problem is that the retired engineering firm executive doesn't always follow his own advice.
"I would find myself trading a little too often," said Giuliano 57. "If the market was going pretty good, I didn't always rebalance, even though I set up digital reminders."
So Giuliano, who lives in Fort Lauderdale, Fla., was intrigued when he heard Jon Stein, the founder and CEO of online adviser Betterment, talk about behavioral psychology.
At the investors group meeting, Stein underscored what Giuliano had read elsewhere, that human beings can be their own worst enemies when it comes to investing.
Betterment offers one solution: automated, passive investing. The online service provides diversified portfolios made of very-low-cost exchange traded funds that are regularly rebalanced. And it's cheap. Investors pay 0.15% to 0.35% of their portfolio's value annually, depending how much they invest. That compares with more than 1% for a typical mutual fund and 2% or more for investments made through many financial advisers.
Giuliano initially invested about $150,000 with the site (there is no minimum) and now has more than three times that amount there.
"What attracted me is that it uses (the principles) of behavioral finance," including automatic investing and rebalancing, Giuliano said. "That, plus the low cost and the fact it doesn't let me meddle too much."
Betterment is one of several fast-growing online services that compete with traditional investment advisers by promising low costs without the conflicts of interest or hidden fees.
Another is Wealthfront. In its previous incarnation as KaChing, the site tried to hook up people with human financial advisers, but "the problem it ran into was the problem of trust," said Adam Nash, a former LinkedIn vice president who is now Wealthfront's chief operating officer.
The site essentially stripped out the human middleman and now offers direct investments in 11 asset classes using index ETFs, provided primarily by Vanguard.
The human influence isn't entirely absent. Burton Malkiel, the author of the seminal investing book "A Random Walk Down Wall Street," is Wealthfront's chief investment officer and a guiding hand in its investment strategies.
"No computer is going to go through all the latest academic research," Nash said. Wealthfront is "a blend of what's best about humans and software."
ETF fees average 0.17% annually, and Wealthfront charges an additional 0.25% for its services. The minimum investment is $5,000, but there's no Wealthfront fee for the first $10,000. To determine your asset allocation, the site asks a series of risk tolerance questions, a survey anyone can fill out for free to get a recommended portfolio. Those who want Wealthfront to implement the strategy simply click on another button to get started.
Wealthfront, which now has $250 million under management, and Betterment, which has $210 million, even provide some of the "hand-holding" that flesh-and-blood advisers often say is their most important function: encouraging people to stick to their plan and not panic when the markets get wild.
"For instance, we tell you if you're about to trade . . . into a portfolio that's too conservative or aggressive for your needs," said Betterment's Stein. "We also email our customers when the market is more volatile -- and even sometimes when it's not -- to remind them to stay the course."
Leading financial planner Michael Kitces, who has kept a close watch on online advisory firms, thinks the sites might be best for investors who currently manage their own funds, using discount brokerages such as Schwab, Fidelity or eTrade.
"I see them as a better DIY option for people who want help . . . with asset allocation, rebalancing, tax issues, but don't want help with all the other adviser stuff" such as insurance, estate planning or budgeting, said Kitces, who blogs at Nerd's Eye View. "They want something that will ensure that (the portfolio) is reasonably allocated and that it's not going off the rails."
Another site that interests Kitces is LearnVest, which offers the kind of basic personal-finance advice that can be expensive and hard to find elsewhere. (LearnVest is a content partner with MSN Money.)
LearnVest targets women in their 20s, 30s and 40s, offering help with budgeting, spending and debt management. The site combines technology with humanity, giving customers unlimited access to a dedicated certified financial planner for $19 a month, plus a set-up fee that varies from $89 to $399, depending on the complexity of the plan.
Those fees are far less than the $150 to $200 an hour investors might pay a fee-only financial planner for similar services, Kitces said.
Many of LearnVest's target customers are looking for basic help with budgeting and credit card debt.
Those are not "$150-an-hour problems," Kitces said. LearnVest "fills a need that isn't being met anywhere else."
The website that comes closest to a real threat to comprehensive, fee-only financial advisers is Personal Capital, Kitces said. This site was founded by Bill Harris, the former head of PayPal and Intuit, creator of Quicken and TurboTax software.
Personal Capital combines free account-tracking software with access to advisers via phone, email, video chat and instant messaging at a fee that starts at 0.95% of invested assets. The minimum investment is usually $100,000.
Unlike Betterment or Wealthfront, Personal Capital is designed to be holistic -- taking all your investments into account, not just the money you have invested directly with the site.
These new sites won't drive the good comprehensive planners out of business, Kitces said. Good planners play an important role in motivating and nudging clients into changing their behavior, such as "reminding them to update their will like they said they would last quarter," Kitces said.
The advisers most at risk are those who charge a lot for a little, such as sticking their clients in cookie-cutter passive portfolios and charging 1% for the privilege, "with maybe a phone call once a year," Kitces said.
"If you're not adding value," he said, "you're in trouble."
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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I would add that at least once in a while you have to treat/reward yourself in some way. You can't take it with you. Also, have a plan on where you want to be financially at the end: spend it all or give it away, give it to the kids, help those closest to you, or whatever would make you happy knowing what was left went to a worthy cause.
My dad always said about his house and savings that it would all be mine one day. That's not what I wanted for my parents. They scrimped and save all their lives so we could be comfortable, never rich but never poor either. I wanted them to treat themselves to something nice in retirement - a nice/new car, a dream vacation, a trip or something they may have wanted or dreamed about but held back on. Didn't have to be expensive, just rewarding.
Be responsible, but life's too short to miss out on something you could have done or had for yourself. Don't leave yourself or your kids with regrets. Live your life and leave with many great memories.
If you follow the investment advice of most of the pay-for-advice clowns, you'd find yourself trading a lot too often! And the same goes for Cramer and the ridiculous headlines on Yahoo and other sites where, when the market drops 2% in 3 days, the headline says something like: "Is it to late to sell from this utterly devastating market catastrophe?"
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