Is an Online Financial Adviser Right for You?

While online banking continues to expand rapidly, financial advising has just begun transitioning to the Web. The gravitation toward online wealth management represents an interesting shift in the financial services industry, but the question on many consumers' minds is whether they feel comfortable entrusting a program--or a person they've never met--to pilot their investments.

For many, it's not an easy decision, but a number of financial industry experts believe online advising can be useful for a segment of the population that's largely untapped by traditional wealth-management firms: the lower to middle class. "These websites provide financial advice to people with less money to invest, and at a lower price point," says Robert Stammers, director of investor education at the CFA institute, a global nonprofit organization of investment professionals. Since traditional firms require clients to have substantial financial assets (some a portfolio size of at least $1 million), many cash-strapped Americans can't afford to hire a financial adviser.

Targeting that demographic are online-only financial advising startups like Personal Capital, LearnVest, and FutureAdvisor. For example, LearnVest's average customer earns $75,000 a year. Clients can choose among three types of accounts, the most basic aimed at people looking to refine their budget. For a starting price of $69, customers who purchase the "budget starter" get two phone sessions with a certified financial planner to craft a spending plan and can receive ongoing support from the planner via email by paying a $19 monthly subscription fee (the first month's fee is waived). Consumers looking for a more detailed assessment of their portfolio and financial advising can splurge on the company's most expensive service, with a startup fee of $399 (followed by a $19 monthly subscription).

[Read Your 401(k): Good or Lousy?]

Although that may seem like a hefty price, LearnVest founder and CEO Alexa von Tobel emphasizes the plan is significantly cheaper than introductory in-person consultations with an adviser, which start at $2,000 to $3,000. "Face-to-face advising isn't an option for a lot of people," she says. "It's just not affordable."

Additionally, von Tobel says LearnVest's prices reflect today's sluggish economy and its effects on Americans' bank accounts. "Financial planning shouldn't be a luxury--it should be accessible to everyone," she says. "When you have less money, every dollar that you have must be maximized."

Von Tobel believes the traditional model for financial advising needs a reboot, which she says many institutions simply aren't willing to do. She points out that the costs for in-person financial advising derive from a number of business expenses that online-only companies don't have, such as office maintenance and administrative assistance.

While LearnVest's business model uses certified financial planners, other companies such as FutureAdvisor provide investing advice generated by computers. The company, still in its early stages of development, targets clients with anywhere from $50,000 to $200,000 in current investments.

According to Bo Lu, co-founder at FutureAdvisor, the website's wealth-management service (currently only available in private beta but expected to launch in May) uses an algorithm based on decades of research which he says concludes long-term, low-fee investing is the best option for most investors. Lu says implementing such strategies on one's own can be difficult, which is why he believes the company provides consumers with a unique service at a reasonable price. "Fundamentally, computers are better at this than humans are," he says. "They're faster, more diligent, and don't have emotions."

[Read: 7 Signs You're Getting Bad Financial Advice.]

Although some like Lu may see a computer's objectivity as a positive, Stammers of the CFA believes some investors would benefit more from consulting a financial planner. "These kinds of programs that are based on algorithms usually ask how you feel about risk, but it's hard to gauge someone's emotional ability to take risk--particularly online," he says. "It's something a person can do better." Stammers adds that a program can't provide the type of emotional support some investors need: "Are they going to be there for you when things get bad and you want to pull your money out? Usually people need to hear from a professional because investing is often emotional."

In an effort to address those issues, some online financial advising companies offer virtual sessions where clients can see their financial adviser and have a conversation like they would have if they met in-person. "Prop up an iPad and turn on iChat and you get the convenient anytime, anywhere experience without having to pay for parking," says Bill Harris, CEO of Personal Capital. According to Harris, another advantage to Personal Capital's business model is that its employees are registered investment advisers (RIA).

Moreover, judging from his prior experience as CEO of Paypal and Intuit, the company that created TurboTax, Harris says tax preparation, brokerage, and banking have made a logical transition to the Web and that it's only a matter of time until the majority of consumers get their financial advice online.

[See 10 Books Investors Should Read.]

Personal Capital also targets a wealthier demographic than most of the other emerging online financial advising companies. It's geared toward the mass affluent (U.S. households with between $250,000 and $1 million in investable assets), a group Harris says has been historically underserved by traditional wealth-management services. Nonetheless, Harris admits some consumers with more complex financial needs will continue to prefer taking their business to a financial adviser at a brick-and-mortar store.

Although online financial advising has its drawbacks, companies including Personal Capital, LearnVest, and FutureAdvisor are banking on the growing desire among consumers for convenience to fuel the shift from in-person to online financial advice. Says von Tobel: "Access is as easy as getting a gym membership."



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