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Incredible Shrinking Management Fee by Jason Zweig
Wall Street Journal
Mar 7, 2014
Professional portfolio management has long cost too much. If a new company has its way, it could be free.
This past week, WiseBanyan, an online-only investment adviser, publicly launched a service that builds and manages diversified portfolios of exchange-traded funds for nothing. There is no minimum account size; nor is there any fee to sign up, to buy the funds or to hold them (other than the underlying expenses of the funds, averaging less than 0.14% annually).
"We're attempting to replicate what good financial advisers do for large clients in an automated, low-fee fashion for small clients," says co-founder Herbert Moore, a former institutional trader who has run an affiliated advisory firm since 2009. It's much too early to say whether WiseBanyan will succeed; so far, it has signed up hundreds of clients, says Mr. Moore. The company ultimately hopes to make money by charging fees for additional services.
But the new venture poses a fundamental question to every investor: If money can be managed this cheaply, am I getting my money's worth from my financial adviser?
Brokers and financial advisers generally ask investors a few questions about their age, income, assets, goals and attitudes toward risk. Then the advisers create an "asset allocation," or mix of stocks, bonds, cash and other investments. Finally, they recommend specific holdings--typically mutual funds or ETFs--to achieve that allocation.
That will cost you, on average, about 1% of your assets every year, even though the process is often highly mechanical and a computer can do it for nothing, as WiseBanyan shows with its "algorithmic" method of determining which portfolios to recommend.
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