Online investment advisers plow cyberspace
By Gilles Castonguay
NEW YORK, Jan 25 (Reuters) - After spending their early years helping corporate employees plan retirement, online investment advisers are venturing deeper into cyberspace in search of people who need help getting their financial life in order.
Armed with pie charts and calculators, Financial Engines Inc. (http://www.financialengines.com) and others are going beyond clients with 401(k) pension plans to offer services to anyone with a computer hooked up to the Internet.
Their target: the millions of people who are befuddled by investment planning but do not want to hire a financial planner.
The market is potentially huge.
``It's going to take us by storm,' said Scott Appleby of BancBoston Robertson Stephens. ``Ninety-nine percent of us don't have a clue how to plan for retirement.'
SERVICE FOR A FLAT FEE
For a flat fee, the advisers devise a strategy based on goals, budget and tolerance for risk. Some only do pension plans, while others handle all of one's finances.
One of the largest, Financial Engines, founded by Nobel prize winner William Sharpe, expanded its service in June after advising individuals on 401(k) plans for two years.
Based in Palo Alto, Calif., it recommends asset allocations and forecasts how well a portfolio of mutual funds will perform in the future, allowing for such variables as mortgages.
Backed by Merrill Lynch and Co. Inc. (NYSE:MER - news) and others, it claims about 250,000 retail and institutional users.
Another, mPower (http://www.401kforum.com), formerly 401k Forum, offers similar services but only for pension plans.
As part of their effort to reach a wider audience, online investment advisers have started linking themselves with Internet portals and other providers of online services.
In early January, DirectAdvice.com struck a marketing deal with E-Trade Group Inc. (NasdaqNM:EGRP - news), the No. 2 U.S. online broker. Two months earlier, Financial Engines made a similar deal with America Online Inc. (NYSE:AOL - news).
Much like online brokers, online investment advisers try to eliminate the need for an intermediary by providing nearly the same services as a financial planner faster and cheaper. They use computers to match individual data on their Web site with anappropriate investment scenario.
Financial planners are not worried about losing business. The advisers would serve people who do not have enough money to hire a planner.
Robert Tull, a financial planner in Norfolk, Va., said the cyber-advisers offered a good primer on the basics of investing. ``It's a tool.'
As a result, Tull said he could focus on more complicated matters that most people would eventually encounter. ``There comes a time when it gets very technical,' he said, citing taxes and estate planning as examples.
POTENTIAL MARKET IMMENSE
Emboldened by the longest bull run in U.S. history, millions of individual investors are trading stocks through online brokerage accounts, shunning expensive brokers.
Pension plans such as 401(k) have also made them more responsible for their retirement, forcing them to think about their financial future for the first time.
More than 40 million Americans have 401(k) plans with between $1.5 trillion and $2 trillion in total assets -- and about three times that amount is invested outside those plans, according to Financial Engines Chief Executive Jeff Maggioncalda.
``There are tens of millions of people trying to figure out how to manage $6 trillion, and most of them would really like some help,' he said.
The universe of personal finance is already crowded with books, magazines, Web sites, newspaper columns, and television shows promoting a dizzying array of stocks and investment strategies.
``People are more confused than they have ever been,' said Jaime Punishill, an analyst at Forrester Research Inc.
Some advisers have yet to distinguish themselves from those with a more human touch because they make the same recommendations as newspaper columnists, said Forrester's Punishill. ``(The field) still needs a lot of work.'
One feature much touted by online investment advisers is their impartiality, unlike market gurus and Internet pundits whose motives can be suspect, if not fraudulent.
Earlier this month, Yun Soo Oh Park, creator of the ``Tokyo Joe' Web site, was accused by federal regulators of getting paid by companies in exchange for touting their stocks.
Online advisers recommend asset allocations rather than stocks. Although they might recommend mutual funds, they say that they do not get compensation.
They also distance themselves from mutual fund families, such as Vanguard Group, which provide similar online advice.
KEY TO SUCCESS
U.S. Bancorp Piper Jaffray analyst Tom Carter said the lower fees charged by online advisers -- a fraction of the cost of financial planners -- could be a key to their success.
Financial Engines charges $14.95 a quarter, while DirectAdvice.com, a new adviser backed by Japan's Softbank Corp. , charges a flat, annual fee of $75 for a complete look at a person's finances.
``We're looking to be very mainstream,' said Bill Hollander, president of DirectAdvice.com in Hartford, Conn.
By comparison, certified financial planners on average charge $100 an hour, according to a recent industry survey.
For those with millions of dollars in assets who can afford the most expensive advice but still want to do it themselves, there's always MyCFO.com (http://www.mycfo.com).
Set up by Jim Clark -- the billionaire who founded Silicon Graphics Inc. (NYSE:SGI - news)., Netscape Communications Corp., and Healtheon/WebMD Corp. (NasdaqNM:HLTH - news) -- the site offers everything from investment planning to tax planning and philanthropy. |
