Young investors who need financial advice face a chicken-and-egg situation. Many financial planners say no to clients with less than $100,000 to invest, but how do you build up that much money without professional advice?
A new Web site aims to break young investors out of this cycle by offering at least a bare-bones financial plan and a suite of index mutual funds to carry it out.
The service, from San Francisco-based
whatifi.com, will spit out an asset-allocation model based on an investor's answers to an online questionnaire about investment goals, time horizon and risk tolerance. The service went live just this week.
Though a number of personal finance and mutual fund Web sites will suggest how investors can allocate their assets among various types of stock and bond funds, whatifi.com offers the opportunity to act immediately on that advice.
Though a paperless transaction system, investors can have money debited from their bank accounts and put their plan right to work on a set of four index funds tracking the large-cap
, the small- and mid-cap
, the international
Morgan Stanley Capital EAFE
Lehman Brothers Government/Corporate Bond
indices and a money market fund. The funds will be managed by indexing giant
Barclays Global Investors
"We don't expect an investor to go through five different transactions to invest," says Harris Fricker, whatifi.com's president and CEO.
The five funds are sold without sales charges and come with low minimum investments. A shareholder can get in for $100 and allocate that money across the fund menu. Subsequent investments of at least $100 can be distributed between the funds. All of this for expenses equal to 0.55% of assets annually, roughly in line with the cost of the average index fund. So in effect, the asset-allocation advice is free. There's a 1% redemption fee for money withdrawn within 90 days.
Given the limited number of investment options, whatifi.com's offering is not much different from asset-allocation mutual funds from low-cost providers
. These all-in-one funds offer a diversification across a range of index funds for little or no charge above the cost of the funds themselves.
But whatifi.com's solution is more customizable, and if investors aren't satisfied with the automated asset-allocation plan generated by the Web site, they can talk to human beings at a call center that will be staffed 13 hours a day by licensed financial reps. Another feature on the drawing board is to contact investors twice a year and ask if they want to rebalance their portfolios. By comparison, Vanguard, which offers a service providing a personalized plan from a financial counselor, charges a one-time $500 fee; Charles Schwab offers a "portfolio consultation" for $400.
Fricker defends whatifi.com's limited investment menu as containing all the elements an investor needs for a diversified portfolio. "Diversification comes from owning the entire market
via index funds with a cash component," he says. "We don't believe in stock picking."
Fricker says he is mulling adding an index fund that tracks the
, a large-cap stock index with a much higher technology component.
Still, whatifi.com's challenge will be to distinguish itself from what's already available. A variety of mutual funds, including asset-allocation funds and balanced funds, offer diversification among stocks and bonds for minimum investments as low as $1,000. (For more on these funds, see
All-In-One Funds Provide Mutual Fund Meals in a Single Bite.)
For investors with even less to invest, about 800 mutual funds have minimum initial investments of $500 or less, according to
, while 38 open the doors for $100.
Whatifi.com is also competing with online outfits like
, which let investors put small amounts into a portfolio of stocks, including partial shares.
There already are some indications that investors don't want to buy funds from companies they don't know. Both
have had to raise their fees because of lukewarm response to their low-cost index funds and the cost of maintaining so many small accounts. StockJungle.com had offered a free S&P 500 fund, but had to fold it after it had raised just $600,000. X.com, which had been selling a no-fee S&P 500 fund that offered a 0.01% rebate, eliminated the rebate and added a 0.15% charge.
Whatifi.com will face the same hurdles, particularly since the company is targeting investors with limited assets. "I don't think any of them will attract any substantial money until they have a track record that's measured in years rather than weeks or months," says Burton Greenwald, a fund consultant in Philadelphia.
What's more, those companies tend to appeal to the Web surfers rather than investors, Greenwald says. "I think anybody with significant amounts of money is looking for funds with pedigree records, and the Internet is the antithesis of that," he says.
On the other hand, young investors with limited assets have few options. The typical fund owner is middle-aged, married and has at least $25,000 invested in funds, according to the
Investment Company Institute
, the mutual fund trade group. Mutual fund companies have largely ignored younger and poorer investors, contends Fricker, a former executive at several Canadian financial institutions. "The distribution channel isn't interested in servicing this segment of the population."