(Money Magazine) -- How do you turn your savings into a comfortable pile of money you can retire on? Good advice helps. And how do you get good advice? Well, you'd better already have that comfortable pile of money.
If you have under $250,000 -- or even $500,000 -- to invest, says Bing Waldert of the financial industry researcher Cerulli Associates, "you're not going to be on the radar screen of a sophisticated adviser."
You could get help from a broker who is paid on commission, but you'll have to worry about whether he's pushing products that make the most money for him -- and not necessarily for you.
But the advice business is changing fast. More of the basics can be done online instead of face to face or on the phone. The web has also made it possible to apply sophisticated financial models to small accounts and for advisers to connect with clients via social-networking tools.
Meanwhile, the growth of cheap, exchange-traded funds has made it easy to construct made-to-measure portfolios on a mass-market scale. Both industry behemoths and tiny upstarts are finding ways to guide not-yet-millionaires. Here's a look at this next wave of investment advice -- what it costs, how it may fall short, and how it can help build your wealth.
Discount brokers morph into advisers
Big names like Schwab, Fidelity, and TD Ameritrade aren't merely processing cheap stock trades anymore. If you're investing as little as $25,000, they'll design your portfolio.
It used to be that there were two kinds of stockbrokers: full-service with advice and no-frills discount. Now that everybody sells cheap trades, the discounters want to sell advice too. T
he big players offer services that will choose for you a mix of mutual funds or ETFs (low-cost funds that trade like stocks and replicate an index such as the S&P 500). Instead of designing each new portfolio from scratch, the brokerage is slotting you into one of a set of model portfolios.
This approach has limits. It doesn't pick funds for your 401(k), for example. But if you have a large IRA you'd like some help with, it could fit the bill.
Depending on the program, you may get help from an in-house "consultant" in choosing the best mix. But with TD Ameritrade's Self-Directed Amerivest portfolios, you can pretty much go it alone using online tools.
You start by specifying how much money you'll want and how long you have to save for it. Then you add some information about your tolerance for risk. Amerivest's calculator tells you the lump sum you'd need today to finance that goal; you can then make adjustments to see what happens if you make regular contributions over time.
After that, the program steers you to a diversified portfolio of a dozen or so ETFs. A "moderate/high risk" portfolio, for example, is 76% in the stock market. You can customize it if you like. From there, the portfolio doesn't change unless you tell it to, although you can set up automatic rebalancing -- that is, selling winners and adding losers to get back to your original allocation.
That's a bit different from the programs offered by Fidelity and Schwab, where a manager has discretion to choose the funds in your account and rebalance for you. (TD Ameritrade also has a separate discretionary product.)
None of these programs have automatic "glide paths" that reduce your equity stake and risk as you age. However, Schwab and Fidelity consultants may help you do that when you periodically review your portfolio.
With Self-Directed Amerivest you'll have to remember to do it yourself, so it's best for those who want to stay fairly involved in their investments.
If you find the task of building a portfolio overwhelming or don't want the hassle, these are a quick solution. And they make the chore of rebalancing a snap.
What's not so great:
If you can do with a less tailored approach -- and many people can -- there's a cheaper way. A low-cost balanced mutual fund can give you a premixed portfolio. So can a target-date fund, which also ratchets down your risk over time.
The 401(k) gets a lot smarter
For much of your career, your 401(k) may make up most of your nest egg. So you could really use some help with it. Would advice from a Nobel laureate do?
Too many employers have just set up their 401(k) plan and left it to each employee to figure out what the heck to do with it. Result: The average near-retiree had accumulated less than $130,000 as of 2008.
Some companies have taken notice of the sorry statistics and are now offering their employees access to web-based retirement-planning services. More than 30 million people now have access to one.
The major players bring impressive brainpower to the task: Financial Engines and GuidedChoice were each co-founded by economists who won the Nobel Prize for developing the basic theories behind modern money management. Ibbotson was founded by another high-powered economist, and is a division of Morningstar, the leading fund analysts.
If your company offers one of these services, give it a spin -- much of the advice comes at no extra charge as part of your plan. First, they offer you sophisticated tools to help you figure out if you are really saving enough -- far better than most free online calculators.
Say your company is using Financial Engines. You'll be able to log into a special website that will already have a lot of your essential information, such as your salary, contributions, and plan details. You can then add some more info, such as when you plan to retire, what your spouse earns and saves, and information on outside investments. From that, Financial Engines will calculate how close (or not) you are to your goal.
Next, it generates specific recommendations to improve your outcome, based only on the funds in your plan. These recommendations are based on number crunching, not a portfolio manager's guess about where the market is headed.
Financial Engines looks at the risk and return characteristics of each of your plan's funds, as well as expenses, to generate a statistically ideal mix. "We're able to do it in a personalized way," says chief investment officer Christopher Jones.
Your plan probably also gives you the choice of letting Financial Engines manage your account. The similar Ibbotson and GuidedChoice services also do so. The cost is often under 0.5% -- a good deal if you don't enjoy running your own money.
Hire your own money manager
If you have at least six figures to invest, you can get an independent adviser to choose your investments. But does it really beat buying a fund?
It's not just the big brokers: Boutique money-management shops are also using technology to make serving smaller clients more efficient. "Face-to-face meetings are very expensive for money managers," says Richard Ferri of Portfolio Solutions in Troy, Mich.
Ferri is strictly an investing guy, not a full-service financial planner -- his firm doesn't provide clients with tax advice or estate planning, and gives only "informal" advice, he says, on what to do with investments in other accounts, such as 401(k)s. In other words, putting your money with him isn't that different from buying a highly diversified mutual fund.
So what's the point? By hiring a money manager, you get some help designing a portfolio suited to you. Portfolio Solutions puts together an investment proposal after interviewing a potential client about his financial needs and risk tolerance.
Ferri picks mostly index funds and holds them for the long term, a strategy you might approximate yourself if you bought his book All About Asset Allocation. (A firm with a broadly similar approach is Index Funds Advisors.) You're paying Portfolio Solutions to keep an eye on the funds -- and to make sure you stick with the strategy. That's not a small benefit for people who have trouble resisting the itch to trade.
Other investment managers are using the web just to sell their stock-picking prowess. One is Formula Investing, co-founded by Joel Greenblatt, a hedge fund manager who wrote the bestselling value-investing manifesto "The Little Book That Beats the Market."
Invest with them and you get 24 stocks chosen by Greenblatt's particular investment criteria. There's some room for modification -- you can specify no gambling or tobacco stocks, for example -- but nothing's truly customized for your investing goals.
While there may be some cachet to hiring a private money manager, it's really not clear what advantage this structure has over buying a mutual fund -- unless you happen to be a die-hard Greenblatt fan.
Costs can be reasonable. Formula Investing's 1% is comparable to a mutual fund. Portfolio Solutions is even cheaper.
What's not so great:
Ferri's minimum of $2,500 annually takes a bigger bite if you have less than $1 million. (With $500,000, you'd pay 0.5%.) Also, you must do serious homework before you invest with any boutique shop. Most crucial: Verify that your money is held in your name at a third-party brokerage.
Investment websites let you watch and follow along
Just looking for ideas? New Internet tools let you check out strategies and execute them yourself. Or you can connect with stock pickers whose ideas you like and have them invest for you.
The web doesn't merely tear down costs. It's also begun to make investment strategy less of a secret sauce and instead a process anyone can track and follow. A new breed of sites aims to bring better trading ideas to the masses. The results are mixed.
Among the better offerings is MarketRiders, a subscription service that helps you build and execute a long-term portfolio for less than the cost of having a broker do it for you.
To get started, you move sliders on a screen to indicate your age, time horizon, current investments, and taste for risk. You get a shopping list of ETFs, including the number of shares you'll need of each.
MarketRiders' strategy is long-term diversification, with no effort to time the market. Whenever your portfolio needs rebalancing, the company e-mails you the trades to make. It's a helpful nudge for investors who embrace the DIY approach.
Covestor and kaChing are variations on the same social-networking movement that's behind Twitter and Facebook. Instead of letting people swap cat videos, they make it possible to share investment ideas.
Covestor lets traders link up their brokerage accounts, so you can see their trades along with comments. Pros and amateurs get equal billing. "We let the records and profiles speak for themselves," says CEO Perry Blacher.
KaChing lets you see trades only of registered investment advisers and others kaChing deems qualified. You can use them for ideas, or have an investor you like run your money. (Covestor does this via a related site, cv.im.) Technically, you're a client of the site, not the manager. That allows pros to serve smaller accounts they wouldn't take on themselves.
It can be very cheap. MarketRiders' $100 subscription is a sliver of what you'd pay to a money manager -- you just have to be willing to make the (fairly infrequent) trades yourself. Following investors' ideas on the social-networking sites is free.
What's not so great:
It can be expensive. If you have your money managed via the social-networking sites, expenses can range from 0.5% (not bad) to 3% (ridiculous). The selection of managers is tiny compared with thousands of mutual funds -- which operate in a more closely regulated industry. And sometimes hanging out on Covestor's main site is like slipping into the wild and woolly world of day traders. One heavily followed investor recently commented: "Shorted 10k of a Hot Chinese Penny Stock." An interesting experiment, but as a place to put your money? Wait and watch.