Technology has changed the way we invest our money. Only a generation ago, the only way to get money directly into the markets was to go through a broker, and brokers often came with some hefty fees. Even today, using the services of traditional investment advisers may cost you more than 3% and likely not less than 1%. The addition of trading commissions, taxes and mutual fund fees can lead to a lot of lost gains over time.
With a host of new and innovative ways to invest, the decades-old fee structure is under attack. What are these new ways to invest and do they fit your style of investing? If they do, you may be able to save a lot of money.
Web technology has allowed nearly everything to be automated; there literally is "an app for that" and that includes investing. Sites like wealthfront.com, betterment.com and marketriders.com all offer do-it-yourselfers a guided approach to investing, without the hefty fees that come with 401(k)s and some advisors.
Most of these services take an academic approach to investing based on Modern Portfolio Theory (MPT). They don't try to beat the market or pick individual stocks; instead, they use low cost exchange-traded funds (ETFs) to mirror the market and rebalance the holdings to redirect funds into the lesser performing areas of the portfolio. Although contrary to conventional wisdom, this buy low and sell high approach may increase portfolio gains as much as 2%, according to sites like marketriders.com.
Some sites allow you to invest into ready-made portfolios based on your risk tolerance. Folioinvesting.com has more than 100 portfolios designed to fit your investing profile. Think of it as online dating, but with investing. If you're 50 years old, have a low risk tolerance and have a tax deferred IRA, there's a folio that matches your profile.
Other sites don't design portfolios, but may recommend an allocation of ETFs that attempt to capture the performance of certain investment products. Betterment.com helps you determine the proper mix of stocks and bonds by asking you a series of questions. Based on these questions, they recommend an allocation of treasury bond and stock ETFs. Your asset allocation will change based on your changing investment profile. As you age, the site will likely recommend a higher weighting of bond ETFs.
Marketriders.com is similar to Betterment, in that it recommends certain allocations, but like many of the others, it helps you to properly rebalance your portfolio. If your stock funds have performed so well that they make up too much of your portfolio, marketriders.com will send you an e-mail telling you exactly what to buy and sell to get your portfolio back into balance.
For the Stock Pickers
Other services, like Jim Cramer's Action Alerts Plus, allow you to trade alongside of him as he buys and sells individual stocks and ETFs. When he makes a trade, the service sends you an e-mail so you can make the same trade. Along with Action Alerts Plus, there are numerous services like this available to traders who want to do more than make long-term investments on broader market products.
Too Good to Be True?
These self-service investing sites may not be the ultra-low cost solution they claim. Action Alerts Plus charges $399.95, or a little more than $33 per month, representing an approximate fee of 1.5% on a $25,000 portfolio. Marketriders charges a monthly fee of $29 per month, making the fees slightly more than 1% of a $25,000 portfolio. These fees are in line with traditional investment advisers, but traditional advisors may have account minimums significantly higher than $25,000. With no management fee for the first $25,000 invested, wealthfront.com may be the best value, but fees alone aren't the only indicator of value.
The Bottom Line
For investors without the knowledge to directly invest, a traditional advisor who has a personal relationship with his or her clients may still be the best choice. Because of the relative infancy of these do-it-yourself sites, they don't yet have a proven track record of providing enough funds for retirement. It may be 20 or 30 years before the validity of their claims are verified. Until then, some experts may advise to invest non-essential funds in services like these and still leave retirement funds to the traditional, time proven advisors.
The mention of the above services does not constitute Investopedia's endorsement of the companies. Complete your own due diligence before committing investment funds to any of these services.