If you’re still in search of a New Year’s resolution, here’s one you’re free to borrow from me: Become a more active and self-reliant manager of your retirement investment accounts, using some of the affordable new tools available online.
This week I’ve been exploring two of the leading services, Jemstep and Personal Capital. After just a few sessions with each, I’m feeling a much greater sense of mastery, knowledge, and control when it comes to my 401(k) accounts and other investments. I may even have identified some changes to my portfolio that will improve my returns down the road—all without spending a lot on fees. And that’s the whole point of these tools, which are available for far less money than you’d pay to a broker or a traditional investment advisor.
“We are targeting those who either are, or are aspiring to be, self-managed investors,” Jemstep president Simon Roy told me in an interview last month. As a confirmed tightwad, I love the idea of DIY investment management—but I never felt I had enough information to make smart decisions about where to put my money. Now Silicon Valley startups like Jemstep and Personal Capital are using the power of statistics and software algorithms to provide the kind of data-driven advice that, in the past, was accessible only to the managers of big brokerage funds.
For the average consumer, retirement planning presents two big challenges. The first one, of course, is saving anything at all. In a slack economy marked by chronic unemployment, it’s hard for many people to make ends meet in the present, let alone think about their retirement years. And let’s face it—we aren’t a nation of savers. In American consumer culture, most of the messages we get from big institutions promote spending as if it’s our patriotic duty.
Most financial firms, though, say that to retire comfortably, you should squirrel away eight to 12 times your expected final-year salary. So if you want to retire at age 65 and you think your gross annual income at that point will be $100,000, you should plan to have a cool $1 million in the bank. But here’s a shocker: half of all American workers have retirement nest eggs amounting to less than $25,000. Even if Congress finds a way to keep Social Security healthy past its expected insolvency date of 2033, that’s a gap that government benefits will never close.
For those who have managed to save a little more, there’s a second obstacle. If you’re like most people today, you’ve worked for multiple organizations in the course of your career, and you’ve got 401(k) or IRA money stashed away across several different investment firms—four of them, in my own case. It can be pretty complicated to keep track of all those accounts, and to make sure you have a portfolio that’s balanced overall, given your investment goals and your tolerance for risk. But if you want personal help from an investment professional, you need to put at least $500,000 on the table. Any less, and the fees just aren’t worth a broker’s time.
“The minimum assets required for a Goldman Sachs or a Merrill Lynch or a Raymond James to be interested in you, and to compensate their brokers, has gone from $20,000 up to $500,000, and for some of the elites, $5 million or $10 million,” Roy says. “What used to be a broad-based service, accessible to the average American, is increasingly available only to the top 10 percent of society.” It’s not that a Goldman or a Merrill won’t let you open a smaller account, Roy says—it’s that they’ll simply stash the money in computer-managed accounts, in which case you might as well manage it yourself.
Roy says that’s why Michael Blumenthal, a South African native with experience at big U.S. brokerages, founded Los Altos, CA-based Jemstep in 2008. Roy, another South African, joined the following year. The main point of the service is to evaluate your existing retirement portfolio and suggest changes that will optimize your risk/return ratio, balance your investments in a way that minimizes the fees and future taxes you’ll owe, and, in the end, increase your post-retirement income.
“What Jemstep is designed to do is take the complexity that most of us have to live with—all of the different accounts, brokerage firms, spouses and partners, et cetera—and make sense of it and deliver a simple direction as to what to do, so you can get on with your life,” Roy says.
The first step when you sign up at Jemstep is to specify your age, your income, your expected retirement age, and your appetite for risk—from conservative to aggressive, defined in terms of the percentage swings in account balances that you could tolerate without throwing yourself out a window. Then you connect the service to all of your financial accounts. In that sense, it’s similar to Quicken, Mint, Check, and most other financial software and apps—and, unfortunately, just as error-prone. In my experience, account access is the Achilles’ heel for most personal-finance services. The problem isn’t just that you have to dig up and type in the usernames, passwords, and secret hints for each of your investment accounts—it’s also that each investment firm labels its funds in a slightly different way, which means it’s difficult for a service like Jemstep to ingest it all cleanly.
In my case, Jemstep connected to the wrong real estate fund at TIAA-CREF, one of my investment firms, and ended up undercounting my assets by tens of thousands of dollars. I had to input the correct data manually. At another firm, Transamerica Retirement Solutions, Jemstep couldn’t connect at all. Such issues make what product developers call the “new user experience” pretty painful, and I’m guessing that most personal-finance startups lose a lot of potential customers this way.
But once you’re past that step, the fun and useful stuff begins. According to Roy, Jemstep’s patented ranking algorithm analyzes 50 attributes for each fund in your portfolio (it’s mainly geared toward analyzing mutual funds and exchange-traded funds, or ETFs, rather than individual stocks). It figures out things like which funds match your risk preferences and which don’t, based on their asset class and historical performance; which funds have reasonable fees, and which ones are probably overcharging; and whether your holdings are intelligently allocated from a tax perspective (for example, high-growth assets such as commercial real estate investment trusts should be held in tax-free accounts). It checks which alternative funds are available to you, based on the firms where you have accounts, and comes up with new ways of distributing your assets.
After running 500 simulations, each assuming different portfolio mixes and market conditions (it’s called a Monte Carlo analysis), Jemstep offers an action plan for reallocating your assets. In my own case, Jemstep concluded that I’ve got too much money in U.S. stocks, and that I should move a bunch of it into international stocks, for the sake of diversification and reduced volatility. The recommendations are personalized, meaning they would have been different for someone with a different ability to take risk due to their age or marital status (I told Jemstep my risk tolerance is “moderately aggressive”). “Think of it as Morningstar meets eHarmony,” Roy says.
I spent a couple of hours generating my action plan on Jemstep, but the process can go much faster. “The goal is to move someone from ‘How old are you?’ to ‘You should buy this and sell that’ in 10 to 15 minutes,” Roy says. Jemstep isn’t a broker, so to move your money around, you have to visit the sites of your investment firms and execute trades—but Jemstep makes that part easier by suggesting which specific funds you should switch to, given the options within the fund families sponsored by your current and past employers.
Jemstep operates on a monthly subscription plan. The fee you pay to see its asset-allocation recommendations depends on the value of the assets you’re tracking. Accounts up to $25,000 are free. Accounts from $25,000 to $150,000 cost $17 per month; from $150,000 to $300,000, $30 per month; from $300,000 to $600,000, $50 per month; and above $600,000, $70 per month. Jemstep instituted the paywall about seven months ago, and so far it hasn’t scared away many clients, according to Roy. Users want ongoing access to the site’s tools because they like to keep tabs on their portfolios over time and make adjustments in response to changes in the market and their life situations, he says.
One missing feature that would make the monthly subscription plan more compelling, in my view, is the ability to tweak the assumptions behind Jemstep’s models. For example, I’d like to be able to see the effects on my own post-retirement income if I decide I’m more likely to retire at age 72 or 75 than at age 67 (as seems likely, given the country’s larger demographic and fiscal trends). Right now, you can’t make adjustments like that without starting from scratch. But Roy says a “sandbox” feature, allowing members to explore alternative scenarios, is on the company’s product development roadmap.
Personal Capital, based in Redwood City, CA, offers services similar to Jemstep’s, one difference being that you can use it to track your whole net worth, including your banking and credit-card accounts, rather than just your investments. Also, Personal Capital offers smartphone and tablet apps in addition to its Web interface, while Jemstep is currently Web-only. I found that connecting my investment accounts was more seamless and trouble-free on Personal Capital than it was on Jemstep. But in the end, both services reported the same account balances, which was reassuring.
There’s a free “Investment Checkup” feature on Personal Capital that offers a rebalanced portfolio allocation based on your risk tolerance. In my case, Personal Capital said that my portfolio was a little too conservative, and that I should increase my exposure to international stocks—just as Jemstep suggested. But interestingly, Personal Capital said I should take the money from my bond and real estate accounts rather than my U.S. stock accounts. I can only guess that the two startups’ models and simulations are based on different assumptions about the prospects for the U.S. stock market.
What Personal Capital doesn’t provide—at the free level, anyway—is specific recommendations about which funds you should invest in to rebalance your portfolio. The startup monetizes its service by encouraging you to hire one of its on-staff financial advisors for that kind of help. Personal Capital can also manage your whole portfolio; fees start at 0.95 percent per year, for users with up to $250,000 to invest, and decrease to 0.75 percent per year, for people with $4 million or more. Yet another Silicon Valley financial-tech firm, FutureAdvisor, also offers portfolio management services, for a flat 0.5 percent per year.
Roy says Jemstep takes pride in not being a broker or money manager, and earning money purely based on its data services. “It’s hard to believe that, systemically, these active managers are going to outperform the market by more than their fees,” he says.
But whatever you believe about the value of professional help, you’re likely to get a better deal—and deeper data—from one of the new online services than you will from the old-line investment management firms. “Unfortunately, too many Americans have been left to their own devices” when it comes to long-term investment planning. Roy says. “And we are talking about their retirement, not a small thing like whether they will buy a Toyota or a Honda.” But that’s now changing—and with today’s tools, there are fewer excuses for not getting a handle on your own financial future.
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