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Online Investing Tools That Leap Light-Years Ahead
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A new wave of Net startups will soon offer much more powerful
capabilities -- and not just for retirement portfolios
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Right now,
the best investment advice on the Web is aimed at investors planning for
retirement. Financialengines.com, mPower.com, and Morningtar's
ClearFuture are all excellent tools for investors to fine-tune a 401(k)
plan. But millions of investors have substantial portfolios that aren't
being used for retirement. And for them, a new wave of Internet startups
is aiming to provide the next generation of free online investment
advice. These sites are light-years ahead of the standard asset
allocation tools that have been around for a decade. Two of these new
sites bring some of Wall Street's most advanced portfolio analysis tools
to the average investor. A third makes it easier to keep track of assets
in different financial institutions.
All these sites are still in their test phases. They don't have
finished, consumer-ready products. Some of their key services haven't
been set up yet. In other cases, they simply haven't made their tools
consumer-friendly. While it doesn't take a genius to use the tools and
read the data, amateur investors will either need professional help
interpreting the results or the site will need to supply far better
analysis.
DYNAMIC PROGRAM. The
most sophisticated of the sites is FinPortfolio.com (www.FinPortfolio.com). Started last
year by former Goldman Sachs risk-management specialist,
this site brings modern portfolio theory to the masses. The core of the
site is a huge database of daily stock and mutual-fund price movements.
The program compares the price changes of stocks and funds to assess
risk based on relative volatility. The database covers the 6,000 most
widely held stocks and funds. If you own IBM and Intel, the program
looks at how their price changes compare over time and tells you which
is more likely to minimize your risk based on your investment goal. Only
Wall Street's elite -- hedge funds and brokerage firms that can afford
it -- now perform this kind of analysis.
With that data at its core, the site can offer a powerful tool for
helping you adjust your investment portfolio so it's tuned to your goals
and tolerance for risk. Plug in your investment holdings, and the site
suggests an optimal asset allocation for each holding given various
levels of risk. It also shows the best way to reduce risk to achieve a
certain return. Most asset allocation models are static, suggesting
changes at a given point in time. This program is dynamic, showing how
changes at any time can reduce risk and effect returns.
Unfortunately, the site has drawbacks. A core piece of information is an
"efficient frontier" graph comparing volatility with returns.
I'd bet most investors would not find it easy to understand. Then
there's the small matter of taxes. When I plugged in a sample portfolio
of stocks and mutual funds, the program told me I should sell one of the
portfolio's core holdings, the Janus Fund. The investment has been a
stellar performer for years. Selling could trigger an enormous
capital-gains tax. Cutting my risk level (high) let me hold onto to more
of Janus, but not much. Future versions of the program will
account for the tax consequences of recommendations made by the model.
ADVISORY SYSTEM. Another
site, Smartleaf, focuses on tax and expenses management. It
calculates the tax and cost implications of selling stocks. Right now it
only works with losers, but it will eventually work with stocks that
gain in value. Using the program's "Loss Harvesting" feature,
I was advised to wait until IBM slips to $110 before selling to take a
loss, after having theoretically bought the stock at last year's high of
$137. I was supplied with specific tax consequences for taking losses --
I'd save $464 in taxes on 100 shares. Oddly, the program doesn't explain
why $110 is the optimal selling price. One weakness: The program does
not let you enter data on stock or fund purchases made in different lots
over time. Instead, users have to calculate a split-adjusted purchase
price on a given date. The ability to enter multiple trades would be
useful for some serious investors and their accountants.
A second feature, due to be released late next month, is a full-fledged
investment advisory system that purports to "replicate the
interaction between investors and advisers, providing an analysis of
proposed trades as well as buy, sell, and hold recommendations,"
Smartleaf claims. Among its planned capabilities is a system that will
calculate commissions, fees, and other costs of particular investments,
and suggest lower-cost alternatives.
SIMPLE TERMS. The
folks at Smartleaf are also working on a risk-management feature,
which CEO Jerry Michael says is similar to the one in FinPortfolio.com.
But Michael says it will be more consumer-friendly. It won't use terms
such as "modern portfolio theory" or "efficient
frontier," which are both in FinPortfolio.com. It will express risk
in simple terms -- by comparing a portfolio's volatility against a
benchmark such as the Standard & Poor's 500-stock index, he says.
Unlike FinPortfolio.com, Smartleaf is operated as a registered
investment adviser. That means it recommends specific trades and can
potentially be held responsible for bad advice. FinPortfolio.com does
not claim to offer specific investment advice and disavows potential
liability for bad advice. Another site, Byallaccounts, appears to
have less technical firepower than the others but plans on letting you
electronically combine all your assets from different financial
institutions into one Web site and perform rudimentary analysis. Right
now, it can only import portfolio data from Yahoo! Among its
capabilities will be a daily net-worth assessment, a risk-and-return
analysis, and an alert system that let's you know if an investment has
collapsed and thrown your portfolio out of whack. This I'll check out
later.
After a bit of tinkering to make them more user-friendly, these
services, or others like them, will be widely adopted by consumers --
and put to use by brokers, investment advisers, and online financial Web
sites. Online brokers have been stealing business from traditional
stockbrokers for years. These new Web sites won't make broker's lives
any easier.
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Smith
covers a wide variety of topics, including personal finance issues, from
Business Week's Boston bureau.
Have a question or a comment? Let him know at geoff_smith@ebiz.businessweek.com.
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| Copyright 2000 BusinessWeek |
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