Financial planning advice and more

Another type of new entrant is aimed at investors who are looking for both financial advice as well as assistance in trade execution and portfolio management. These new entrants fall into the following 3 sub-categories:   

2- Portfolio advice and investing in index funds 

This is another of our favorite models, since it addresses a second fundamental need of many retail investors, how to invest in a low-cost passive manner using index products..

Software is better at investing than 99% of active investors. That is how one tech person explained the advantages of combining indexing and technology to a friend with both a technology background and  new money to invest personally:

But my second response was to tell him that, when it comes to investing, I thought he should play to his strengths. He built his soon-to-be fortune by helping grow one of history’s most powerful software platforms; he is walking proof of Marc Andreessen’s assertion that “software is eating the world.”  So why manage his money the way it would have been managed 50 years ago? Hiring an expensive investment advisor or moonlighting as a stock picker were both bad choices in a world in which technology continues to make our lives simpler and cheaper.  My assertion to him: these days, software is better at investing than 99% of active investors. To clarify a bit, by “software”, I really meant passive, software-based investing services. As opposed to active investment advisors who charge higher fees and pick individual stocks or mutual funds, passive software-based investment services determine a suitable asset allocation given your risk preferences and invest your money in a diversified portfolio of low-cost index fund and ETFs. Nick Shalek  

This type of analysis has led to a number of new entrants favoring the index fund route. Here are some of them.

Probably the best known index- based new entrant is WealthFront  given its association with Burton Malkiel , one of the best known proponents of index investing and author of the famous classic finance book A Random Walk Down Wall Street. Wealthfront itself describes its process as follows:

Our investment methodology employs five steps:

• Identifying an ideal set of asset classes for the current investing environment
• Using Modern Portfolio Theory to allocate them for different risk tolerances
• Selecting low-cost investment vehicles to represent the asset classes
• Determining your risk tolerance and creating a customized portfolio for you
• Providing rebalancing and ongoing management

Here is a description of WealthFront by Leena Rao:

A recent portfolio designer is Wealthfront , which describes itself as an SEC-registered, software-based financial advisor. Dr. Burton G. Malkiel, the Chemical Bank Chairman’s Professor of Economics, Emeritus, and Senior Economist at Princeton University, is chief investment officer. Dr. Malkiel is the author of the widely read investment book, A Random Walk Down Wall Street, which helped launch the low-cost investing revolution by encouraging institutional and individual investors to use index funds.  A questionnaire is used to determine each client’s risk tolerance, and depending on the level the client’s funds are invested in corresponding categories of assets, with automatic periodic rebalancing. Actual investments in each category are in low-cost index ETF’s, sand are held by a third party. Management fees are in the order of 0.25% per annum, and the  minimum asset balance is only $5,000. We manage $10,000 for free and the rest for only 0.25% per year. You won’t pay commissions on trades or any other fees. No investment specialists or advisers interact with customers; all is done online. Assets are all invested in low-cost ETF’s (mainly Vanguard ETF’s) and are  held by a third-party custodian.

When you begin using Wealthfront, the platform will ask you a number of questions to evaluate your risk, in order to create a tailored investment plan. For example, Wealthfront will ask if you own stock options, if you’ve ever made an angel investment, etc. The platform will then recommend an optimized portfolio of carefully selected Exchange Traded Funds (ETFs) spanning six asset classes, and monitors and periodically rebalances the investment mix to maintain a customer’s desired risk tolerance. Rachleff explains that Wealthfront only uses exchange traded index funds because the target audience of tech professionals tend to be fans of ETFs because of low-cost nature. Another element of the platform that Rachleff highlights is transparency. Wealthfront will show precisely what you’ll invest in before you commit. Users have full visibility into how their portfolio is performing at any time. And there are no advisory fees on a customer’s first $25,000 under management, and only a fee of 0.25% on assets exceeding $25,000. Leena Rao   or as a PDF doc.22xx- Rao 2011 Wealthfront Debuts Customized, Intelligent Online Investment Advisor.pdf.

Another index-based service is Portfolio Solutions  , a SEC-registered investment advisor founded by Richard Ferri , a well known long time author and  advocate of low-cost index investing. The self-described mission of Portfolio Solutions® is to help investors achieve the highest probability and confidence in meeting their financial goals by developing low-cost investment strategies using low-cost index mutual funds and ETFs for client portfolios; a minimum relationship of $500,000 is required.  A small number of CFP-qualified employees work with clients to help ensure that their investment strategy is appropriately aligned with their financial goals and objectives. Most interaction, however, seems to be via questionnaires. A third party custodian holds customer assets.

Our management fee at Portfolio Solutions® is only 0.37% per year for your first $3 million in assets under management, and decreases even further to just 0.20% for assets over $3 million.* *A total relationship value below $1 million is subject to a $925 minimum quarterly fee in lieu of the 0.37% annual management fee. This management fee is the only source of revenue for our company — Portfolio Solutions® does not receive any commissions or bonuses on the investments that we use in your accounts. There are no start-up fees, no annual administration fees and no hidden costs, all fees are transparent. Total cost includes our low management fee, mutual fund expenses, and trading costs. Be confident that more of your money is working for you. A typical investment manager charges fees of 1% per year on average. That’s much too high given the technological advances in the investment management industry over the past 20 years. High investment manager fees persist because the public doesn’t know that a low-cost solution has been available at Portfolio Solutions® for more than a decade. Portfolio Solutions 

We need to understand why you are investing, in order to determine the level of risk and return necessary for you to be confident in your plan. An experienced Investment Specialist will work closely with you to gather the information necessary to make these critical decisions. Portfolio Solutions http://www.portfoliosolutions.com/our-process-2/confidencemap-planning/ ... Your Investment Specialist can now utilize information from your ConfidenceMap™ Plan to develop your ConfidenceMap™ Portfolio, which will detail your asset allocation as well as the level of risk necessary to achieve your financial goals…. Your ConfidenceMap™ Portfolio consists of the following:

1. Implementation of the asset allocation defined in your ConfidenceMap™.
2. Monitoring your account(s) and rebalancing assets when necessary in order to maintain your appropriate level of risk.
3. Regular progress reporting on your investments.
4. Updating asset allocations based upon major life changes. PortfolioSolutions 

Here is Henry Mannes’ take on PortfolioSolutions:

Boutique money-management shops are also using technology to make serving smaller clients more efficient. "Face-to-face meetings are very expensive for money managers," says Richard Ferri of Portfolio Solutions in Troy, Mich. Ferri is strictly an investing guy, not a full-service financial planner -- his firm doesn't provide clients with tax advice or estate planning, and gives only "informal" advice, he says, on what to do with investments in other accounts, such as 401(k)s. In other words, putting your money with him isn't that different from buying a highly diversified mutual fund. So what's the point? By hiring a money manager, you get some help designing a portfolio suited to you. Portfolio Solutions puts together an investment proposal after interviewing a potential client about his financial needs and risk tolerance.
Ferri picks mostly index funds and holds them for the long term, a strategy you might approximate yourself if you bought his book All About Asset Allocation. (A firm with a broadly similar approach is Index Funds Advisors.) You're paying Portfolio Solutions to keep an eye on the funds -- and to make sure you stick with the strategy. That's not a small benefit for people who have trouble resisting the itch to trade. ... Ferri's minimum of $2,500 annually takes a bigger bite if you have less than $1 million. (With $500,000, you'd pay 0.5%.) Henry Mannes   or as a PDF doc.22xx- Mannes 2010 The future of financial advice .pdf.

Jemstep is a new entrant that also favors low-cost index funds. It describes its mission  as follows:

Jemstep Portfolio Manager is an easy-to-use online investment guidance and management service that helps individual investors optimize their investment portfolios to maximize returns without undue risk.

Ari Levy describes its business as follows:

The dark truth about the financial services industry is that brokers such as those found at a big bank branch or a strip mall often receive a cut from mutual fund managers when they make a sale. Brokers tend to lean toward the funds offering higher commissions, regardless of their performance. And that bias can result in a bad buy for the average Joe investor. Jemstep aims to remove the bias with its money-management website, which lets retail investors import their retirement-account data and get automated advice, said Roy, the startup’s president. Jemstep offers free advice on asset allocation and will charge a flat monthly fee, starting at $18 per month, based on the size of the user’s retirement portfolio in exchange for suggestions about specific funds to buy and sell. Because Jemstep doesn’t play the fund-commission game, the Los Altos, California-based startup typically recommends inexpensive index funds, instead of the pricier mutual funds that brokers seem to love. For those managing less than $25,000 in retirement assets, the service will remain free. The price to manage larger portfolios can be as high as $70 per month, including portfolio analysis, tracking and rebalancing advice.  Ari Levy or as a PDF doc.22xx- Levy Bloomberg 2013 Why You Should Consider Taking Financial Advice From a Computer.pdf

Jemstep offers various levels of service:

A Basic Account is free. With it, you get an analysis of your current asset allocation along with Jemstep’s recommended allocation for your situation and goals, four sample buy and sell recommendations for improving your portfolio and reaching your goals faster, and a simple way to track all your retirement accounts in one place. With a Premium Account, you also get Jemstep’s detailed Action Plan for building, managing, and optimizing your ideal portfolio … continuous tracking of your progress toward a secure retirement … and instant alerts and guidance when it’s time to rebalance or change investments – all for a flat monthly fee based on the total value of the investment accounts you link to your Jemstep account. (If your investment assets are less than $25,000, a Premium Account is free.)…

The investor continues to invest with his own broker. Jemstep does not receive any fee when you invest in Jemstep recommended funds:

The result is a specific, transparent Action Plan for you: exactly what to buy and sell to achieve your goal without undue risk. Jemstep’s investment recommendations are technology-based and data-driven. We receive no fees from any of the funds we evaluate or recommend. So you can trust Jemstep Portfolio Manager’s guidance to be transparent and objective.... With Jemstep, you continue to buy and sell assets in your usual way: online if you have an online brokerage account, or through your broker or financial advisor. So there’s no need to make changes to your current financial relationships. If you have a broker or financial advisor, you can use Jemstep Portfolio Manager to evaluate his or her advice and recommendations, quickly and easily…. Jemstep