The following is written by our friends at Modest Money, a personal finance and investing site.
For many years, there was a massive generation gap when it came to investing. Our parents and grandparents had their ways of buying and selling stock. This involved lots of phone calls and newspapers – perhaps a little emailing thrown in as the technology came into being. The early days of web investing brought out new players like Vanguard. Vanguard offered (and still offers) bottom of the barrel pricing for automatically diversified portfolios, but their platform is still set up for an earlier generation. It answers questions that Generation X-ers were asking, not the ones asked by Millennials. That’s why a new generation of platforms have recently emerged to update the investment process for today’s youngest adults. They’ve even lowered the already-low cost pioneered by Vanguard. It seems like a new platform is emerging every month, but here are a few good examples.
$10 has been the magic number for online trading for quite a while now. For years, online traders could buy or sell any amount of a single stock for that price. Today’s digital innovations have taken a lot of the human labor out of that process, making the infrastructure and maintenance costs a lot more affordable for the average platform. This has changed pricing fundamentally, and different platforms have responded with new innovations.
Take Motif investing, for example. Motif seized on that familiar $10 figure, but changed the product beneath it. Rather than offering just one stock or ETF trade for $9.95, Motif sells them in bundles of 30. Each ‘motif’ is built around a core concept – like “South American Coffee” or “Solar Power” or “Chinese Industry” or “BioTech Innovators”. Some of the motifs are built solely for diversity, efficiently pulling together ETFs that represent the contents of entire global markets. It’s a very affordable way to invest in a single sector or a market as a whole. The price point simply cannot be beat.
Other platforms have a different way of providing value to their user investors. Services like Wealthfront and Betterment have ready-made portfolios for their investor users. The user doesn’t get a chance to monkey with the contents of their portfolios (they’re built for maximum diversification and long term growth potential), but they can make slight changes to stock/bond ratio based on their risk tolerance. These users get unlimited trading (buying and selling) for a simple fraction of their account balance each year (.15% to .35%, depending on balance size and platform chosen). The services do all of the selling and rebalancing necessary to keep a client’s portfolio in the allocation distribution chosen when the account was originated. Because all of these functions can be performed by algorithm, this greatly reduces the cost necessary to keep the thing going.
In the end, all of these services have a common element – they’re cheaper because they can do what the old-school services can in a much more efficient way. This drives down costs, gives users a lot more automated options, and allows for more nuanced action on the part of the user without the need to build up complex investment behaviors from scratch.
What I really like on Betterment is that they have calculators to show you what you can expect to have in your retirement.
So you can plan your retirement better and with fewer surprises and be more tax efficient.
The platform is definitely there. I hope this becomes more mainstream so that people can invest as early as possible.