"I have a hard time believing any adviser—they all want to sweep up my assets and collect 1% of the total annually."
Meanwhile, she joins the growing ranks of so-called mass affluent investors (variously defined as investors with $100,000 to $1 million or $2 million in investible assets) who end up "self-directing" their portfolios—fending for themselves, many by default.
Assets at the likes of Fidelity Investments, Charles Schwab,SCHW +3.31% Vanguard Group and other so-called direct providers of investments grew 9% to $3.7 trillion in 2011, from $3.4 trillion in 2010, outstripping the 3% growth in retail investment assets overall, according to new research from analytics firm Cerulli Associates.
Sensing an opportunity, direct providers have been shrewdly expanding their own investment advisory services. At the same time, a new breed of online financial advisory firm is out to do what human advisers do, only with software—and without the mazes of fees and conflicts of interest that can plague traditional brokerage firms.
Here's the lowdown:
Discount brokers and no-load fund companies generally offer different levels of service.
The most basic comes in the form of all-in-one funds. These are off-the-shelf funds with a diversified mix of investments. Some, such as Fidelity's Asset Manager funds and Vanguard's LifeStrategy Funds, maintain a fixed asset allocation over time. Others, such as target-date retirement funds and 529 college-savings-plan funds, are managed with a specific date in mind and grow more conservative as that date approaches. In either case, all you pay are the management expenses of the fund.
Schwab and Fidelity offer a range of so-called managed accounts, portfolios of funds and individual securities assembled by professional money managers. At Schwab, the minimum account size is $25,000 for a diversified portfolio of mutual funds or exchange-traded funds. Annual account fees range from 0.2% to 0.9% of assets, on top of the underlying fund fees.
You also can buy a financial plan that comes with a list of recommended investments. At Vanguard, the cost is $1,000 for those with accounts under $50,000, and $250 for those with between $50,000 and $500,000 in assets at the firm. This includes the plan and a one-time phone consultation with an adviser.
For your own personal financial planner who'll provide continuing investment recommendations, Vanguard charges an annual "service" fee of 0.7% on the first $1 million in assets, 0.35% on the next $1 million, and 0.2% on subsequent amounts—on top of its fund expenses, which average 0.19%. There's a $500,000 account minimum, and a minimum annual service fee of $4,500.
Software-based advisers invest your money in portfolios of low-cost index funds, using algorithms to determine the mix of investments that's right for you. They also continuously rebalance your account when stock-bond allocations stray from targets.
Betterment.com charges an annual fee equal to 0.35% of assets on accounts up to $10,000, 0.25% on amounts above that, up to $100,000, and 0.15% on amounts above $100,000. It allocates your money between two diversified baskets of ETFs—one containing stocks, the other Treasury bonds.
Wealthfront.com charges nothing on investment amounts up to $10,000, and 0.25% on higher amounts. It uses a wider array of asset classes, including municipal and corporate bonds and real estate. And it continually trolls for chances to realize losses to offset gains in an effort to improve after-tax returns.
At both services, fees embedded in the cost of the underlying ETFs average an additional 0.14% or so per year.
Adam Nash, Wealthfront's chief operating officer, says rebalancing alone can add 0.4% a year to returns and better tax planning, another 1%.
Wealthfront's clients value transparency more than a human touch, he adds. For them, trust is earned not with a handshake but with clear, timely disclosure of costs and portfolio holdings.
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