Some good reads from around the Web.

I have dug up an extra great list of links this week, so just a brief intro via a graph from Business Insider, showing one crazy day in Greece.

In normal times I’d argue that equating broad stock market moves with micro-political developments in a country worth 1% of European GDP was risible.

But these are not normal times – I was watching the markets closely on Thursday, and I watched it happen:

Of course, it’s much better to ignore the markets and your portfolio for months at a time. Short-term volatility doesn’t matter when it comes to long-term returns.

[continue reading…]

We’ve previously looked at how you should buy index funds not ETFs if you want to invest in the simplest products possible (and remember, there’s nothing wrong with simple!)

Low-cost index funds also win hands down against ETFs if you make small, monthly investment contributions.

The decisive factor here is dealing fees.

Dealing fees are charged by online brokers every time you buy or sell an ETF. But they are not applicable to most index funds.

These dealing fees can gobble up a huge amount of a modest monthly contribution, and so torpedo returns in the long term:

• You might expect to pay £10 in dealing charges on a trade – or at best £1.50 (on purchases) if you sign up to a regular investment scheme.

• £10 in fees would slice 20% off a £50 contribution. Deadly! It’s still an unacceptably high 3% in the case of the regular investment scheme.

• I wouldn’t contribute less than £300 on a monthly basis to an ETF in a regular investment scheme. This reduces the dealing charge to a manageable 0.5% of the investment.

For any small investor who wants to pay into a diversified portfolio every month, it’s pretty easy to see how dealing fees make multiple ETF trades unaffordable.

On Expenses

The other major cost consideration is which kind of tracker has the best Total Expense Ratio (TER)?

In the UK, the cheapest index fund usually trumps the cheapest ETF on TER, at least when it comes to the broad market indices that passive investors paddle in.

If you do find an ETF with a lower TER than a rival index fund, then you can do a quick battle of the costs (including dealing fee) by using a Fund Cost Comparison Calculator.

Just scroll down to find the calculator and type in your dealing fee percentage in the initial charge box.

Next part: What about tracking error?

Take it steady,

The Accumulator

In this guest article, Adam Price, founder of VouchedFor.co.uk, reviews the new wave of start-ups looking to shape the evolution of online financial advice.

There has already been much written about what effect the Retail Distribution Review might have on the investment and pension market.

The abolition of commission and the introduction of advisory fees is thought likely to cause the IFA ¹ sector to shrink. Fearing the impact on sales, life companies, wrap platforms and asset managers are expected to launch numerous ‘direct-to-consumer’ offerings.

The question is, what will the next generation of direct offerings look like, and will they engage, educate and inspire the average ‘mass affluent’ consumer?

Consumers are today presented with a bi-polar choice. They can either take matters entirely into their own hands, spending significant time (months?) learning about investments before visiting an online brokerage (as many readers of Monevator will do), or they can delegate everything to a financial adviser who they meet maybe once per year.

For the average consumer, who is used to fast, efficient and engaging online solutions, neither prospect is particularly appealing.

Online financial advice start-ups

Perhaps the best indication of what the future has in store for internet-savvy consumers comes from the new wave of tech-based start-ups.

The approach these companies take to online financial advice falls into three categories:

1. The Virtual Adviser – Online tools that seek to replicate what financial advisers do today. Discover, educate and advise.
2. The Remote Adviser – Leveraging technology to connect financial adviser and client, regardless of location.
3. The Social Adviser – Crafting online communities capable of educating and advising one another.

1. The Virtual Adviser

“Could technology replace advisers?” is a question I’ve heard a few times. The idea is that an online financial advice service could:

• Aggregate your finances from various sources
• Take you through a fact-finding questionnaire
• Algorithmically design a portfolio that fits your attitude to risk and cash flow requirements
• Execute that portfolio for you (likely using low-cost ETFs)
• Monitor and rebalance it as time goes

PersonalCapital.com has recently launched in US, with Bill Harris (former CEO of PayPal and Intuit) as its CEO and with $24m of Venture Capital funding. It is the most credible offering I’ve seen that pretty much promises to do all of the above. That said, it also comes with a human adviser for a 1% p.a. fee.

Similar propositions include Betterment in US and RPlan (currently in private beta) in the UK.

Will they replace advisers? I don’t believe so, even on a ten-year timeframe.

Instead, I could imagine in ten years’ time financial advisers being called upon by a broader base of people, but with more specific and advanced advisory requirements.

With adviser and client both having access to the same platform, different clients would bring advisers into their ‘journey’ at different stages, depending on their individual need.

2. The Remote Adviser

In the view of the future I just outlined, I see financial adviser quality and niche-specialism becoming more important than geographic proximity to the client.

This will no doubt be aided by online video conferencing and co-browsing technologies. Indeed one start-up, Virtual Advisor, has already designed such a technology, which overcomes the regulatory challenges associated with distance-selling of financial products.

This leads me to my own category of start-up. VouchedFor.co.uk along with Brightscope in US and AccretiveAdvisor in Canada, all promise to help consumers find the right financial adviser for them.

VouchedFor takes a Trip Advisor user-review approach to comparison, while Brightscope takes a MoneySupermarket-style data-based approach, and AccretiveAdvisor takes a Match.com profile-matching approach.

Today, these websites promise to offer those seeking an adviser a better route than the Yellow Pages or similar. In my longer term view of the future, I can see such models becoming the market place for consumers seeking specialised advisers who can connect with them and their portfolios online.

3. The Social Adviser

Increasingly, individuals are turning to blogs and forums for financial advice.

It scares me how many people post “what should I do with the £500k I just inherited?” on MoneySavingExpert! Fortunately, somewhere among the answers is usually some sensible advice.

What these communities typically lack though is a ‘financial graph’. With Facebook and Twitter, we know who we’re listening to – defined by either their ‘social graph’ or ‘interest graph’ respectively. If I were to take financial advice from an online community, I’d want to be connected with people of similar financial situations, goals, attitudes (such as passive vs active), as well as to be confident of their credentials (if any).

Covestor (US) is an interesting start-up. It allows you to see different individuals’ investment portfolios, and their performance. When you see one you like, you can follow it – i.e. set your portfolio to replicate theirs. In so doing, a small fee in effect flows from you to them. At its extreme, the concept threatens to do to fund managers what Zopa (peer-to-peer lending) threatens to do to banks.

A very different social advice concept is Lovemoney. This site enables you to form groups based on financial goals (e.g. pay off the mortgage, or retire early) and share experiences.

Rplan (mentioned above) also promises to leverage this concept. Once you have set up your portfolio, they then plan to connect you with similar investors and relevant experts.

None of these is yet the Facebook of Finance, but nonetheless it is an interesting space to watch.

To wrap up…

I’ve painted here a picture of how I see technology shaping the future of financial advice. Like any prediction, I can at best hope that I’m directionally correct albeit precisely wrong.

My intent is to help stimulate the debate. Whatever form it comes in, I’m convinced this market is ripe for technology-led disruption.

No mention in this article of any online financial advice product or service should be taken as an endorsement by Monevator – it’s early days for most of them, so please do your own research. For more from Adam, follow him on Twitter (@VouchedFor).

1. IFA is an acronym for Independent Financial Adviser[↩]