A number of online services promise to help you maximize your investment returns for a minimal fee. Should you use one of these services, or do professional, fee-based financial planners justify their higher costs with better returns and a higher level of service? Maybe managing your own investments is good enough, and it’s free, too. Here’s what you can expect from the available options and how to choose. (related: Shopping for a financial advisor.)

Services

Online portfolio management services vary in what they’ll do for you, but in general, their goal is to get you into investments that lower your fees, reduce your income tax liability and improve your returns. They also help you rebalance your portfolio regularly so that your asset allocation stays about the same even as the market changes.

Some online services give you recommendations to help you make better investment choices on your own, such as NextCapital, Jemstep, MarketRiders  and FolioInvesting. These services can pair well with a DIY investment approach since they leave you in charge of your money. Others, such as BettermentHedgeableFutureAdvisor and Wealthfront—as well as most financial advisers—do the work for you, which means you must be comfortable granting them access to your money. Before granting an online service or a financial adviser access to buy and sell investments on your behalf, check their background. Look for their form ADV at the Investment Adviser Public Disclosure website (adviserinfo.sec.gov) to learn whether they’ve registered with the SEC, and check item 11 to see if they’ve been disciplined. Financial advisers might have been brokers previously; to get their full history, consult FINRA's BrokerCheck website

Financial advisers can do more than just manage your portfolio, though.

“The real value of a good financial planner is not in managing your investments,” says Matt Becker, the founder of Mom and Dad Money, a fee-only financial planning practice dedicated to helping new parents build happy families by making money simple. “It's in understanding your goals and helping you form a complete financial plan that incorporates your budget, savings, investments, insurance, taxes, estate planning, career and anything else with a financial impact,” he says.

Investment Philosophy

Most online portfolio management services are similar in their investment philosophies; they just present their philosophies with a unique hook or offer a slightly different value-added service to differentiate themselves from their competitors. They typically allocate portfolio assets based on each client’s risk tolerance and put customers into low-cost exchange-traded funds (ETFs), relying on modern portfolio theory to guide investment selection and to decide when you should buy and sell. If you do it yourself, you’ll probably be making investment decisions based on books or articles you’ve read and based on your past experience with investing. Financial advisers subscribe to a variety of investment philosophies, so you’d want to interview potential candidates and choose someone whose philosophy makes sense to you.

Account Minimums

Most professional financial planners and advisers have high account minimums--half a million dollars is common. Unlike financial advisers, many online portfolio management services have no account minimums, at least for a basic account. NextCapital, Jemstep, Betterment and MarketRiders have no account minimums, though MarketRiders would prefer you to bring at least $25,000 to the table. Hedgeable and Wealthfront require at least $5,000.

Some companies offer both basic and premium services, and they impose higher minimums for the latter. FutureAdvisor has a $3,000 minimum for new basic accounts and its premium plan has a $10,000 minimum, Hedgeable’s premium RetirementPlus program requires $50,000, while FolioInvesting has no minimums for its basic service but requires $100,000 to receive its tax-loss harvesting service.

The minimums for do-it-yourself investing depend on the account type and brokerage where you place your assets. For example, Fidelity has a $2,500 minimum on brokerage accounts, but waives its $2,500 minimum on Roth IRAs when you make automatic monthly contributions. Vanguard has a $1,000 minimum for its target-date funds and a $3,000 minimum for its mutual funds. TD Ameritrade has no minimum to open a Roth or an individual brokerage account. 

Cost

A fee-based professional financial planner or adviser makes money by charging clients a percentage of assets under management per year. If your adviser’s fee is 1% and they manage $500,000 for you, you’ll pay them $5,000 per year. A few advisers offer different fee structures in order to work with lower net worth investors. For example, Brian Frederick, a Certified Financial Planner and fee-only financial adviser with Stillwater Financial Partners in Scottsdale, Ariz., charges a monthly retainer of 1% of his client’s income plus 0.5% of their net worth. He also provides holistic financial planning, not just investment advice. 

Some online portfolio management services—NextCapital and FutureAdvisor—are completely free. Most charge a percentage fee, which sometimes changes with your account balance. Betterment’s fees range from 0.35% annually for under $10,000 in assets with a $100 per month automatic investment ($3 per month without), 0.25% annually for $10,000 to $99,999, and 0.15% annually at the $100,000 level. Jemstep, Hedgeable, Wealthfront and FutureAdvisor are free at the basic level, but charge more when you cross an asset threshold (Jemstep, Wealthfront) or switch to premium service (Hedgeable, FutureAdvisor). 

But the services that appear to be free won’t necessarily save you money overall. If you still have to pay commissions with a free service to make trades, you may be better off paying a fee to a service that includes all trading commissions in its price. FolioInvesting charges $29 per month for unlimited trades or $4 per trade with a minimum of $15 per quarter for the basic plan. Betterment includes transactions, trades and rebalancing in its fee. In every case, the fees are substantially lower than what you’d pay a financial adviser.

Do it yourself and your fees will include the commissions, if any, you pay to buy and sell your investments. You could pay $9.99 per trade with a service like E*Trade, or $0 if you have a Fidelity account and limit your portfolio to Fidelity-branded funds and its 65 commission-free iShares ETFs, which are broad enough to create a diversified portfolio at any risk level. You’ll also pay the expense ratio of every mutual fund, index fund or ETF you hold. But you’ll pay expense ratios on the investments an online service or financial adviser oversees, too.

Does it make sense to pay so much more for a financial adviser? It depends on what kind of investor you are.

“The real value an adviser offers is the ability to help clients manage their emotions,” says David A. Schneider, a Certified Financial Planner with Schneider Wealth Strategies in New York, N.Y. “I'm not sure that an online only service can provide the hand-holding that many investors need.” 

Returns

Many online services post their historical returns, but as the saying goes and the fine print is quick to remind clients, past performance is no guarantee of future returns. Whether you earn anything like the advertised returns will depend on how closely you follow the service’s advice (for those that make you place your own trades) as well as how the market performs. Also, we’ve been in a bull market for the last five years, so it’s hard for a service not to make its historical returns look good right now.

“The real test of these online financial advisers will be the next bear market, as that is when financial adviser hand holding is paramount. How sticky will the online advisers’ assets be?” says David Stein, former chief investment strategist and chief portfolio strategist at Fund Evaluation Group, a large investment advisory firm. 

“While the returns should be very close, I see the online portfolio manager delivering a slightly better return for three reasons: the cost is lower, the online portfolio manager makes more use of tax-loss harvesting, and depending on how the fee-only adviser manages portfolios the online portfolio manager might rebalance more frequently,” says Frederick. He estimates the online service’s returns to be 1% higher or less over a multiyear period. 

“I would not recommend that a client seek out an adviser in search of bigger and better returns,” Becker says. “So if you're able to ride the roller coaster and stick to your plan all on your own, and if one of the online platforms has an investment philosophy you believe in, then I think they are great options.” 

If you’re managing your own investments, there’s a good chance you’re earning much less than you could be, according to research by DALBAR, a financial services market research firm. Its 2014 Quantitative Analysis of Investor Behavior found that the average investor has underperformed the S&P 500 by 4.20% over the last 20 years, earning 5.02% instead of 9.22%. 

The Bottom Line

While online investment services could be major disruptors, they also could find a place alongside financial planners since different people have different needs when it comes to growing and managing their nest eggs.

“My opinion on online portfolio managers is that it is a good thing that consumers have more low cost choices. Instead of fighting them, as advisers we should look on how to embrace them in order to lower costs and provide services at a price point consumers want,” Frederick says.  Indeed, some services are already set up to work with, not against, financial planners.

Determine your needs and priorities, and use those to inform your choice of using an online service, hiring your own adviser, both, or doing it all yourself.

 

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