New investing offerings aimed at the mass retail investor market are gradually appearing that are based on online advice. They use online questionnaires and other technology to minimize labor costs and provide cookie-cutter advice using model portfolios, with some customization to take into account some personal circumstances. Do-it-yourself investors, who have made the decision to manage their own investments, often want to get advice on a cost-effective basis focused on the key determinants of long term returns, such as the right Asset Allocation, but have had  trouble locating sources for such advice. Instead they often end up receiving recommendations based upon stock-picking or market timing techniques that are rarely as successful as a low-cost, buy and hold indexing approach. Do the new investing offerings address these unfulfilled needs of retail investors? Why are so few of them available to Canadian investors? In part 1 of this 3-part series we  look at the forces behind these new product offerings. Do you recognize yourself in some of the reasons driving investors towards online solutions? In part 2 we will look at the broad range of new entrants in the USA,  and In part 3 we will look at developments in Canada .

Introduction- what about the small investor?

The appearance of new entrants aimed at the mass retail investor market is primarily driven by one simple fact: financial advisers are rarely interested in clients with small portfolios, typically defined as less than half a million dollars:

• How do you turn your savings into a comfortable pile of money you can retire on? Good advice helps. And how do you get good advice? Well, you'd better already have that comfortable pile of money. If you have under $250,000 -- or even $500,000 -- to invest, says Bing Waldert of the financial industry researcher Cerulli Associates, "you're not going to be on the radar screen of a sophisticated adviser." You could get help from a broker who is paid on commission, but you'll have to worry about whether he's pushing products that make the most money for him -- and not necessarily for you. George Manne or as a PDF doc.22xx- Mannes 2010 The future of financial advice .pdf.

For a more direct quote, consider the following quote by a Merrill Lynch director:

• Many full-service brokerage firms have been increasingly focused on high net worthinvestors. According to Jeffrey Lippert, a Merrill Lynch District Director, as quoted in theWall Street Journal:“If there are still financial advisors that really enjoy servicing small accounts,please let me know, and I will get you a nice salaried job in the Investor Services Group where you can deal with poor people to your heart’s content” p. 232 of Tiburon 2005 advice report  or doc.21xx- Tiburon 2005 The Future of advice study.pdf

So what should the average retail investor do? Our position is that every individual investor should pick the investment method that best helps him or her to invest on a cost and tax effective manner in a diversified portfolio of investments with an asset allocation appropriate to their personal circumstances. Our recommended approach for the investor who shares our philosophy  and wants to take the full do-it-yourself (DIY) approach is to:

• determine the right  asset allocation; if the investor needs help in this regard, one-time, cost-effective independent  financial advice paid in an easy to understand, transparent fashion (such as on an  hourly basis)  is our recommended approach; on hourly vs other fee models, see Oblivious Investor  or as a PDF doc.22xx- Piper Oblivious Investor 2010 Asking the Advisors  How to Pay for Investment Advice.pdf.
• determine asset classes subdivided by asset category and geographic market;
• select low cost index ETF’s that correspond to each category;
• select and invest with a discount broker;
• hold for long term; and
• rebalance periodically.

The weak link in this approach is the difficulty, for investors who want to use discount brokers but also want advice when required,  in finding one-time, cost-effective independent financial advice. Conversely the traditional alternatives for investors who do not choose the DIY route is a full service broker; the weak link in that approach is that it is often commission based, and advisers typically practice stock-picking and market timing (almost always less successful in the long term than a passive indexing approach).

At the other end of the pendulum, investors with substantial investable assets often prefer to hire an investment counsel who provides total portfolio management services on an annual asset-based fee basis; the weakness here is self-evident, only a very small percentage of retail investors have the size to interest investment counsel, and fees at the lower end can sometimes be surprisingly high.

Other common intermediate alternatives include seeking assistance from entities who limit their services to certain products or services; advisers who are limited to mutual funds are one example. But limiting one’s investments to the offerings of one such adviser has its own weaknesses, such as limited product selection and higher costs.