New Ways to Manage Your Portfolio

ASSISTANCE WITH PORTFOLIO BUILDING IS ALMOST AS OLD as the Internet itself. One of the first Websites I ever reviewed for investors, back in 1992, offered asset allocation as a core feature. If I remember correctly, that entailed a short risk assessment and an estimate of how much cash one had to invest. Seventeen years later, these systems are much closer to realizing the ideal of providing good investment advice, free from the pressure of an in-person sales pitch. Two more attempts are on their way: Cake Premium and Covestor Investor Management.

They’re entering a competitive field. Online brokers TD Ameritrade (http://www.tdameritrade.com)and E*Trade (http://www.etrade.com) have recently rolled out tools that recommend portfolios of exchange-traded funds and occasionally select mutual funds. And this summer we’ve seen two other entrants that work alongside your chosen online broker. MarketRiders (http://www.marketriders.com), for example, for a $100 annual fee offers a way to build and rebalance a portfolio of ETFs (Electronic Investor, July 13).

Cake Financial (http://www.cakefinancial.com), an aggregation and community Website that was launched in 2007 (Electronic Investor, Sept. 22, 2008), unveiled the new Cake Premium platform and service late last week. Explains CEO Steve Carpenter: “What we do, with very few pieces of information and by connecting retirement and brokerage accounts, is show you how you can do better, get back on track for retirement and pick a better allocation with better holdings, which we then monitor for you.”

One interesting piece of the analysis Cake Financial performs is comparing the cost of holding various mutual funds with alternatives that it suggests. The service tries to save you money on management fees when it makes a recommendation, which is a nice touch.

At a cost of $99 a year, Cake Premium reviews what you already own and what you’re trying to accomplish. To get started, you enter your age, when you want to retire and your current salary. You connect your online brokerage accounts by entering your user names and passwords, then you enter any other assets that aren’t in either your salary or connected to your accounts, such as home value, checking accounts, cash and other offline assets. Cake connects to about 60 online brokers, including all but one of the brokers we reviewed this year in our annual online ranking, thus avoiding any additional data entry on your part.

From there Cake Premium calculates three things: your asset allocation, your risk level, and what you’re spending annually on mutual-fund fees given your current holdings. The “Cake Take,” a proprietary, investor-generated stock-rating system, is displayed for each of your current holdings.

After running simulations, Cake Premium finds alternative funds and ETFs that are lower cost. Carpenter says, “We handle close to 100 investor-use cases, such as ‘properly allocated but holdings are wrong; holdings and risk levels wrong; within 10 years of retirement; more than 10 years to go,’ and many others.” Carpenter says the built-in models provide solutions for just about every possible scenario.

Cake Premium recommends—based on where you are and where you want to go—a variety of ETFs and low-cost mutual funds across six basic categories: large-cap growth, large-cap value, small- cap growth, small-cap value, international and fixed income. Carpenter notes, “We look for low-cost alternatives, index funds, ETFs and those 5%-10% of actively managed funds that do well over time and actually earn their fees.”

This system is not the way to go for sophisticated investors who trade derivatives, or for investors who are close to, or in, retirement and have the bulk of their investments in cash vehicles. It works well for mainstream investors with over $100,000 set aside for retirement, with the majority in stock funds. It’s designed for a once-a-year rebalancing of the portfolio and for long-term buy-and-hold investing. We also found during testing that it didn’t recognize closed-end funds, but that’s typical of this type of tool.

Once you’re done with all six pieces of the asset allocation pie, you get an action plan that tells you what you have to do in each of your brokerage accounts. You’re advised to print it out and place the appropriate trades; then Cake will monitor it for you on your own dashboard. The site lets you keep up to date on your overall portfolio performance, plus it keeps tabs on how much you’re saving in mutual-fund fees each month.

What I like about Cake Premium is that it ties in all of your existing online brokerage accounts, which means no additional data entry. Once you’ve executed the recommended trades that you want to place, your dashboard back at the Cake site automatically reflects those changes. It’s also interesting to see the savings in mutual fund fees, which will more than likely offset the $99 yearly fee.

COVESTOR (http://www.covestor.com), which is a community Website for self-directed investors, has entered the fray with Covestor Investor Management (http://www.CV.IM). This system creates a money-management account that you use to subscribe to a particular investing model. You must have a brokerage account with either TD Ameritrade or Interactive Brokers (http://www.interactivebrokers.com) to use this service.

The models are built by Covestor members, who share their trading strategies and techniques with one another. You go through a series of qualifying questions to determine your risk appetite, then you are shown models that would work for your style. You commit some of your portfolio to follow recommendations issued by one of the model builders. Each model author has an extensive profile, showing his or her trading frequency, number of holdings, preferred asset classes (stocks, ETFs, short sales, etc.), and returns against a variety of benchmarks.

Covestor Investor Management has just 10 model managers right now, but the firm expects more in the near future. You’ll pay each money manager 0.8% to 1.5% of the amount entrusted to his or her care in management fees, plus any commissions generated by your broker. It could get expensive following managers who recommend 30-plus trades a month, and a quick survey of the available models showed none beating the S&P 500.

Posted by on 08/29 at 04:23 AM

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