We buy when prices are high and sell just as the markets are bottoming out. Or we cannot bring ourselves to sell investments that have done well to buy more of what hasn’t. Or we buy on impulse, picking up individual stocks of companies we like and think we understand without much regard for how they may fit into an overall investing strategy.
Some of this behavior springs from a red-blooded insistence that we are all above average and can easily pick stocks and other investments that will outperform the market.
But our collective failure is also a result of the fact that we are literally left to our own devices. Advice from a human being is sorely lacking when we sign up for workplace retirement plans, and there is a severe shortage of moderately priced financial advisers who will help nonmillionaires and put customers’ interests ahead of their own.
Someone will make a lot of money by coming up with a streamlined way to serve these investors, and two services called Betterment and Flat Fee Portfolios are among the latest to try.
Betterment is notable for an almost radical simplicity and its insistence that even someone with just $1,000 is welcome. The Flat Fee Portfolios model is built around a fixed price for advice no matter how big your portfolio is — a far cry from the usual method of having customers pay, say, 1 percent of their assets each year in fees to the adviser.
Neither one may have cracked the code, but they are different enough from most of what’s come before to be worth a look for those of us who recognize that we are constitutionally incapable of managing our own money.
First, a bit more about Betterment, which began operations last year. Once you decide how much to invest, you have only one choice to make: the amount of risk you want to take on. Once you’ve figured that out, there is just one portfolio to invest in (a mix of exchange-traded funds, which are index-fundlike investments that Betterment makes in United States stocks and government bonds).
The company lets anyone use the service, which is admirable in an industry where many financial advisers won’t work with you unless you have more than $500,000 or $1 million, and even “discount” brokers may not manage your money for you unless you meet some kind of account balance minimum.
Betterment is pretty costly, on a percentage basis, for people with less than $25,000, though. Customers pay 0.9 percent in annual fees, which the company takes out of their investment account. The fee declines in three incremental tiers from there. For any money beyond $500,000, the fee is 0.3 percent.
Betterment’s portfolio consists of six United States stock funds and two bond funds, which invest in short-term Treasury bonds and inflation-protected bonds. The company makes its portfolio public on its Web site, so there is nothing stopping you from mimicking it on your own. The company charges no trading fees beyond its annual fees, however, and it rebalances your portfolio for you. So Betterment is betting that enough people are willing to turn everything over to its service and will pay for the privilege.
But Betterment has two glaring weaknesses. First, there are no individual retirement accounts available, so you can’t set up a Roth I.R.A. there or roll over money from a retirement plan you have at a former employer. Second, the portfolio has no international stock funds, a risky choice given all the questions about the American economy. Betterment’s chief executive, Jon Stein, says the company will fix both of these problems this year.
He remains insistent, however, about sticking to just one blueprint for customers’ investments. “We don’t want to break that glass box and start having multiple portfolios,” he said. “People will start picking things that have gone up the most recently, and that is a terrible choice. We want to be simple.”
Flat Fee Portfolios offers a few more investment choices and even simpler pricing than Betterment. It’s also aimed at more affluent customers, people who have six figures in money to invest but don’t have the kind of broader financial planning needs that might merit an adviser who charges more money.
The fee is $199 a month if you have more than $250,000, and it does not grow no matter how much money you have. If you have less than that, you can enroll in a different program with fewer choices and less service for $129 a month.
At the $199 level, you can choose among three types of portfolios. There is one made up of actively managed mutual funds, an indexed portfolio of passively managed funds like the one that Betterment offers, or a portfolio that is more tactical and temporarily moves money to the sidelines when the markets get crazy. A real human adviser reviews your investments with you twice a year, and Flat Fee does the trades for you. At the $129 level, the portfolios are simpler and fewer in number and you have only one meeting a year.
Mark A. Cortazzo, Flat Fee’s founder, named the service after the price offering in an attempt to hint at its conflict-free nature. Like a growing number of investment advisers, Flat Fee earns money only from customers, not from commissions from mutual fund companies.
But even that is no guarantee of a lack of conflicts. “If you have half a million dollars and I’m charging you 1.5 percent of your assets each year, and you call me wanting to take $100,000 to pay off your mortgage, the advice you are getting is conflicted,” he said.
That is not how pricing usually works when advisers charge annual fees to customers. A financial services software company called PriceMetrix recently surveyed its clients who charge annual fees, from Morgan Stanley on down to smaller firms. It found that 37 percent of individual advisers were charging management fees of more than 1.5 percent a year on portfolios of $250,000 to $500,000 that have an even mix of stocks and bonds. Meanwhile, just 23 percent levy fees of less than 1 percent.
“There is no typical price,” said Doug Trott, the president and chief executive of PriceMetrix. “It’s a well-supplied industry, but it’s not very competitive.”
Whether Betterment and Flat Fee Portfolios can afford to stay in business in the lower pricing tiers is an open question. Betterment has about 4,000 accounts but the average balance is roughly $5,000 right now. It’s hard to imagine that it will ever make money unless it attracts many more people.
Mr. Cortazzo, of Flat Fee Portfolios, said he had already made investments in the six figures in staff and his Web site, and he figured he would be spending more than he made for at least 18 months more. His financial planning firm, Macro Consulting Group, has $500 million under management; profits from that line of business allow him to invest in the Flat Fee part of the operation.
But he says he believes that his challenge is more about streamlining his service and efficiently finding his target customer than it is about competition. “Most small advisory firms don’t have the staying power to get to critical mass to make this profitable,” he said. “And the big financial services firms who could do this would cannibalize their existing business by coming up with model-based solutions with lower costs.”
That said, there are some similar services. I’ve written about MarketRiders and AssetBuilder in the past. Folio Investing is another one worth considering.
Meanwhile, Vanguard, Fidelity, Charles Schwab, TD Ameritrade and E*Trade all have their own offerings. If you’re considering any of them, check the fees and ask whether there’s an investment minimum, whether they will trade and rebalance for you and whether they’re using the very best funds or ones that the firm has created. (As usual, links to every service I’ve mentioned are in the online version of this column.)
Again, it’s not at all clear which of these services, if any, is built to last. But their proliferation is a welcome development at a time when the number of advisers and institutions interested in helping people with smaller balances continues to shrink.
“A whole segment of customers is being dislocated,” Mr. Trott said. “And there will be new opportunities for companies to satisfy their demands.”
Article source: http://feeds.nytimes.com/click.phdo?i=69c0f01ca99df79fc5868c93ace4c371
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