Do-It-Yourself Investing Gets Easy

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Bev Hollis, 54, worked with a LearnVest adviser to get her retirement on track.

En español | After Bev Hollis got divorced four years ago, she made an unpleasant discovery: She didn't have enough money to cover her retirement.

Because her ex got the bulk of their investable assets, Hollis, 54, a veterinarian and pet photographer, found it hard to get the attention of the financial-planning firm the couple had used when they were married.

That company made its money through fees and commissions, and Hollis' account wasn't large enough to generate much income for the adviser.

"I felt like a smaller and smaller fish," recalls Hollis, who lives in Frederick, Md. "I needed someone to help me understand what was doable and what wasn't."

Hollis found that service at LearnVest, one of a new breed of digital financial firms that rely heavily on sophisticated technology — namely powerful computers and algorithms — to assess clients' financial situations and recommend investments. The idea is to let computers do what computers do best: analyze vast amounts of information and offer advice based on logic, rather than turn to brokers who may be trying to sell a particular product.

"An algorithm is reliable," says Jon Stein, founder and chief executive of one of these sites, Betterment. "It doesn't wake up on the wrong side of the bed, it doesn't have conflicts of interest, and it doesn't react to current events."

For a lot of people, good guidance doesn't have to come with a high price tag, says Michael Kitces, a partner at Pinnacle Advisory Group in Columbia, Md. Sites that simply review a portfolio, monitor it and make suggestions typically charge a flat fee depending on the amount invested, usually around just $20 a month. Those that go a step further and manage money, such as Betterment or Wealthfront, assess a charge of about 0.25 percent of the amount the client has invested with them. They generally provide a narrower range of services than comprehensive financial planners, though the pricing compares very favorably with what many advisers charge, which is typically $150 or more per hour or a fee equaling 1 percent of investments.

"Many of the new online financial tools represent a tremendous leap from what's been available for the past decade," says Kitces, who has studied online experts and blogs about their potential to change the shape of financial advice. Bob Veres, publisher of the San Diego–based Inside Information newsletter and website for financial advisers, sees the sites as a threat to those who aren't adding much value. Still, he doesn't think "robo-advisers" can replace the knowledge and personalized care a living, breathing financial planner provides.

"A lot of the calculation work that advisers do now can be automated," says Veres, "but the personalized advice that comes from it cannot."

There may be other drawbacks: The companies themselves are start-ups, and it's difficult to assess what their long-term performance will be. And not all start-ups survive. In fact, two digital wealth-management ventures backed by big companies — NestWise, a subsidiary of broker LPL Financial Holdings, and BloombergBlack, an investment advisory arm of the data and media giant Bloomberg LP — were shut down abruptly last year. While investors generally won't lose money managed by sites that close (because customer accounts are insured for up to $500,000 against bankruptcy and fraud), switching advisers is always disruptive.

Hollis used LearnVest to track all her financial accounts, construct a budget and connect with a certified financial planner who could answer questions about how much to save and where to invest. She filled out a detailed questionnaire and got back a 20-page plan with recommendations to increase her savings rate and keep her long-term care insurance. In follow-up phone calls, the two tackled other parts of her financial life — including her decision to sell her condo and rent for a while to free up more cash to invest. Hollis feels confident she'll be able to retire at 65 with 70 percent of her current income. "I'm in way better shape than I'd ever thought I'd be," she says.

While each company targets a slightly different audience, the sweet spot is the "mass affluent" — the 40 million or so U.S. households with assets between $100,000 and $1 million. It's a market many bigger, traditional financial-services companies are trying to reach: Vanguard Group, well known for its low-cost funds, gives free financial advice to investors with more than $500,000, and Schwab offers a financial plan to its clients for $2,000 (AARP members get a 20 percent discount). The new sites may also appeal to people with less than $100,000 to invest, since signing up is easy and often doesn't require switching accounts and big upfront costs.

Among the new players, Wealthfront and Betterment emphasize their software, which assesses clients' risk tolerance, analyzes their goals and constructs diversified portfolios for the money invested. Both firms allocate their customers' money among several low-cost exchange-traded funds primarily from Vanguard, then rebalance automatically so the ratio of stocks and bonds doesn't stray from the target mix.

Venture capitalist Kittu Kolluri, 50, of Saratoga, Calif., tried Wealthfront after hearing about it from his nephew. While most of Kolluri's wealth is still invested with a traditional adviser who gives him access to specialized investments such as private equity deals and hedge funds, Kolluri says his smaller Wealthfront account is earning returns as good as or better than the publicly traded stocks and bonds his regular adviser has picked.

Susan Shaffer, 67, of Yardley, Pa., tried a variety of traditional advisers before investing about $100,000 two years ago with Betterment. Shaffer, a manager for a pharmaceutical company, liked Betterment's low fees and its investment options. Some of Shaffer's previous advisers were "constantly moving funds around" — either from investment to investment or in and out of the stock market, she says. Others recommended she stick with a limited number of stocks or mutual funds. She was concerned she wasn't diversified enough, and the cost of all this active management was about 1 percent a year.

"The fees were higher," says Shaffer, "and I wasn't really seeing the returns."

What Wealthfront and Betterment don't do is provide comprehensive financial planning. Outside funds, such as 401(k) retirement savings or accounts at other brokerages, aren't tallied in their assessments.

But other new sites do look at the bigger picture. FutureAdvisor analyzes all of an investor's accounts for free. The site also offers ongoing management — for a fee — of accounts held at Fidelity or TD Ameritrade, as well as any accounts investors are willing to transfer to those brokerages, says CEO and cofounder Bo Lu.

Jemstep, meanwhile, focuses on retirement accounts. Though the site currently doesn't manage money, it provides monitoring and alerts to clients. SigFig analyzes portfolios for underperforming assets and recently added a service that will automatically implement its recommendations. The analysis is free, while fee-based management costs $10 per month for all accounts over $10,000.

Even sites that offer more complete analysis typically aren't providing comprehensive advice. The technology-focused services generally don't offer guidance about how to get the maximum Social Security benefit or how to determine what's your best savings withdrawal rate in retirement.

That's the bailiwick of firms like Personal Capital, an online money manager that merges technology with the human touch. People who invest over $100,000 are offered a diversified portfolio of exchange-traded funds and individual stocks, plus they're assigned a personal adviser to answer questions and provide guidance.

Those human advisers "are how we distinguish ourselves from the technology firms," says CEO and founder Bill Harris, a former head of PayPal and Intuit, "and technology is how we distinguish ourselves from the traditional advisers."

That high "touch" — the human component — comes at a price. Although Personal Capital provides free account-tracking software, hiring an adviser — reached via phone, email, video chat or instant messaging — triggers a fee.

Alexa von Tobel, who left Harvard Business School to start LearnVest in 2009, agrees that the human touch is needed. It's more important to offer advice, she says, than investments.

"For most people the problem isn't that they have an abundance of assets," von Tobel says. "They're living paycheck to paycheck. They need advice so they can have enough money to invest."

And while a lot of the services target younger people "who are more comfortable interacting with a mobile device than a person," says Inside Information's Veres, older investors are catching up. More than 600 of Wealthfront's nearly 6,000 investment clients are 50 or older; their accounts on average are greater than $150,000 — 50 percent larger than that of the site's typical client, says Adam Nash, chief operating officer of the Palo Alto, Calif.–based firm. "The baby boomers were the generation audacious enough to believe you don't need a full-service broker to place a trade over the phone," says Nash, referring to the advent of discount brokerage Charles Schwab in the 1970s. "They understand the value software can bring to create a low-cost portfolio that's smart about taxes."

Liz Weston is a freelance personal finance writer based in California and author of Deal With Your Debt.

Also of Interest

• Take charge of your money at 50, 60 and 70
• The best places to retire
• Get free help with your taxes with AARP Foundation Tax-Aide

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