PersonalFinance: Web-based financial advisers

WASHINGTON (Reuters) - Your financial adviser can be replaced by an algorithm. At least that’s the theory behind a number of Web-based services aimed at individual investors.

Here’s how it works: You type in your investment portfolio, and the Web site does the rest. It will analyze your portfolio, tell you what you’re doing wrong, and then tell you what to buy and what to sell so that you’ll save money on fees and prosper throughout a variety of market conditions.

"We think financial advisors can be replaced by $10-a-month software, just as Turbo Tax replaced expensive CPAs with $59 software," says Mitch Tuchman, founder of one of the newest sites, MarketRiders (www.marketriders.com.)

MarketRiders is founded on modern portfolio theory -- the idea that most investors can’t beat the market, and should focus instead on staying diversified, staying invested, and keeping their advice, management and trading costs low.

It’s a remarkably simple, easy-to-use site: Visitors employ sliders to give their age, comfort with risk, investment experience and how soon they’ll need the money. In return, the site gives them a five or six category portfolio, typically consisting of us and foreign stocks and bonds, inflation-proof bonds, and real estate. The site then suggests low-cost exchange-traded funds for each of those categories. Continuing participants can count on the site to tell it when to rebalance by adding to some positions or subtracting from others. “It is not rocket science,” says Tuchman.

Other sites make it seem more like rocket science. Hedgeable (www.hedgeable.com), also uses hidden formulas to give investors portfolios and making trading recommendations. But at Hedgeable, which bills itself as "the hedge fund for the rest of us," the guiding philosophy is the opposite of the one at MarketRiders. Hedgeable eschews buy/hold/rebalance investing in favor of dynamic asset-allocation -- an approach that recommends making big portfolio moves in response to market movements and perceived risks. It recommends portfolios that also include stocks, though they are also ETF-heavy. It recommends investments that employ some complex hedging strategies.

A third service worth noting is "Instant X-Ray" at Morningstar (here). The investment research firm will analyze your portfolio of stocks and mutual funds and let you know how much you are paying in fund fees and how diversified you are. It does not go the extra step of telling you what to do about it.

A fourth service, which was really the original advisor-in-a-box Web site, is Financial Engines (www.financialengines.com). This site offers portfolio-building advice to individual investors, and is also based on modern portfolio theory, but it caters mainly to 401(k) investors and is often offered to plan participants through their employers.

To some extent, Tuchman and his colleagues make an excellent point. Investing a generic, middle-income portfolio might be a generic exercise, and there’s a lot of research behind the idea that diversification and cost containment might be the most important parts of the exercise. Even folks who want to turn their portfolios over to a paid expert would do well to analyze their investments on their own; the more they learn, the better they’ll be at choosing the right expert and supervising the way that advisor manages their money.

Here are a few pointers for using the DIY investment sites:

-- Try out several of them. Most of the sites listed above offer a free level, or at least a free introduction. It takes moments to input a starter portfolio and see how they work. In addition to the sites named above, most online brokers offer similar services to their account holders. Charles Schwab (www.schwab.com), eTrade (www.etrade.com) and Ameritrade (www.ameritrade.com) all offer some fairly detailed portfolio planning services. Some are free and some are available even if you don't have an account.

-- Be aware of what’s not included. Many of these sites pay no mind to whether your portfolio is in a tax-deferred retirement account or a traditional taxable account. But that’s an important consideration in how you hold investments and in deciding which investments you hold. Most of the programs also don’t consider your own tax situation in terms of deciding which investments would produce taxable gains or tax-deductible losses if you sold them.

-- You can kibitz too. A couple of sites are based not so much on portfolio analytics, but on combining investing ideas with social networking. Two relatively new sites that let you copy portfolios and investment choices of other investors are KaChing (www.kaching.com/investors/find) and Covestor (www.covestor.com).

-- You still have to type. Watch that space for the next development in online investment management: Aggregators that will allow you to sweep information from several different brokerage and mutual fund sites into one site that will analyze the data. That will keep you from having to manually enter your portfolio over and over. And it will allow you to keep different accounts at different companies but analyze and plan them together.

-- Test and benchmark. Both Hedgeable and MarketRiders allow back-testing of their portfolios and other portfolios you put into their sites. But it might make sense, before adopting one of these automated experts as your sole source of investment advice, to run parallel portfolios for a while. See who does better -- your flesh and blood financial planner or the broker-in-a-box that’s just a mouse-click away. Then vote with your cash.