Putting It All Together

Financial Planners: Online vs. Brick-and-Mortar


Financial Planners: Online vs. Brick-and-Mortar

Photograph by Charlie Engman for Bloomberg Businessweek; Graphic by Jessica Hagy

My wife and I had been putting off getting a financial planner for at least a year. This was in keeping with our—OK, my—habit of delaying efforts on things that had a Limited Immediate Payoff and were generally considered Good for One’s Future. But after a second child and new jobs for both of us, it seemed time for someone to help us figure out what to do with our money.

I once worked at a personal-finance magazine, albeit writing more about how to spend than how to save, so I felt mildly knowledgeable about what people should do with their money. The gospel of financial planning is pretty commonsensical: Spend less than you earn; save for retirement before your kids’ college costs; invest in low-cost index funds from Vanguard and the like. Leave stockpicking to gamblers, etc.

My time in personal finance also gave me a solid network of friends and former colleagues who could recommend a planner for my own needs. As it turned out, they all recommended the same one. Armed with their unanimous endorsement, my wife and I scheduled an appointment.

I should interrupt here: That dutiful, responsible impulse to seek out a planner was present in both of us, but there was something more self-aggrandizing at work, too. Hiring a planner implies that you have finances sufficient to require planning. While what we sought to do was not purely a luxury—it is, after all, a good idea to have a plan for your money—there was a part of all this that was pleasing and affirmative that we had “made it.”

Photograph by Charlie Engman for Bloomberg Businessweek; Graphic by Jessica Hagy

We went to visit our financial planner-to-be and were immediately reassured by the Park Avenue address, a well-appointed waiting room with crown molding, and framed photos and letters from happy, affluent families. To top it off, the planner was a fee-only shop, which meant it earned no commissions from the financial products it recommended. (This is really the only kind of planner you should ever talk to.)

My wife and I had a lengthy conversation with the two owners of the firm and an associate. They asked us roughly 972 questions, which may sound tedious but was actually delightful. First off, the questions were about ourselves, so that’s fun; in this way, financial planning is very much like psychotherapy. Second, we felt that every question brought us one step closer to our sustainable, responsible financial future. It was like the financial equivalent of exercising.

We left the advisers’ offices excited and relieved. Our money would be properly allocated, our investments guided to the most efficient mutual funds, and our spending kept within bounds—all by sensible, highly educated men and women in really, really nice suits. All we had to do was furnish the firm with our most up-to-date financial information and fill out a questionnaire together to assess things like our tolerance for risk.

Oh, and we had to pay them $5,000.

The first two steps we addressed swiftly. I got PDFs of banking statements and the like and e-mailed them within a couple of days. My wife and I sat down one evening and went through the 30-page questionnaire, answering questions about what we would do if we bought a stock and it cratered six months later (we answered “c”: do nothing and ride it out) and outlining our financial goals for the future (“not be broke” was our animating principle).

It was the $5,000 that was the sticking point. While my wife and I were making good money, $5,000 is still a considerable chunk of change. I would often think about it this way: If you added together all our retirement accounts—IRAs, 401(k)s, etc.—we had about $200,000 socked away. Now, if the planner’s taking $5,000, then the first 2.5 percent that money earned would be replacing what we paid the planner. That seemed like a fairly big ante.

Then I read an article about online financial-planning websites like LearnVest, NestWise, and Plan & Act that offer similar services for far less. I could think of 5,000 reasons to look at the alternatives.
 
 
I signed up with NestWise, which was founded by a Wharton professor. For $250, NestWise would match you to one of its 17 advisers. Your adviser would craft a detailed financial plan that you would execute. All we had to do was furnish the firm with our most up-to-date financial information and fill out a questionnaire to assess things like our tolerance for risk.

Sound familiar? That’s what struck me. In practice, this wasn’t terribly different than what Park Avenue was offering. In both cases, all my wife and I were seeking was a road map for our finances: Save X each month in your 401(k)s, set aside this much to grow your emergency fund, and so on. Whether that was done in an office of fine leather and rich mahogany or on my laptop while I, pantsless, ate Hot Cheetos was immaterial.

The first step you take with NestWise is to fill out a “FactFinder”—an omnibus statement of your income, assets, and liabilities. The FactFinder has some neat tricks: If your employer is in NestWise’s database, FactFinder can automatically pull in all the funds available in your company’s 401(k), saving you the chore of entering them manually. The FactFinder goes to a living, breathing financial adviser, who crafts an assessment and action plan. My adviser, who works in Florida, was prompt, courteous, and professional. If I e-mailed him, I got a reply within 24 hours, and most often within just a couple of hours.

I finished my FactFinder on Friday, Nov. 30. On Monday, Dec. 3, I received two documents from my adviser: a financial plan and an action plan. The 23-page financial plan included information like how much I’d be able to spend per month in retirement if I followed the plan’s suggestions ($15,273) and what I’d need to save each month to fully fund private out-of-state college for my two kids, aged six and two ($1,110).

The action plan was a series of steps we would need to take to meet the goals laid out in the financial plan. Here’s how it broke down:
 
• We should have an emergency fund. Everyone should have a cash cushion in case of crises such as major home repair, health expenses, or unemployment. A rule of thumb is to save the equivalent of at least three months’ expenses. In our case, that would be $30,000.
 
• My wife and I can participate in 401(k) plans—my adviser suggested we each contribute the maximum allowable amount ($17,500 annually). I should put my money into six of the available funds: five Vanguard index funds (surprise, surprise) and one actively managed emerging-markets fund.
 
• My 401(k) has good fund choices, apparently, and my wife’s doesn’t. But she does have the option to self-direct her 401(k), which would open up her options. She should sign up for that and then our adviser would have fund recommendations.
 
• We can contribute up to $5,500 each annually to an IRA. My adviser suggested we do that, too, after first determining if we could, and provided fund recommendations.
 
• Old 401(k)s from our previous employers should be rolled over into IRAs (something we’d been meaning to do anyway).
 
• A fairly simple equation that accounts for our children’s ages, compounded interest, and inflation gave us the amount we should save for in their 529 plans.
 
• I have a $1 million life insurance policy, but I should get more—at least another million. My wife should get some life insurance as well—also at least a $1 million policy.
 
• We should get long-term disability insurance. My wife should get a will (I already have one), and we both should get living wills and powers of attorney, which you can do online through sites like LegalZoom for $69.
 
And that’s pretty much that. Would the Park Avenue planners have provided a plan that was terribly different? I don’t think so, and, more important, I don’t think I’d want them to. What I got from NestWise is a very straightforward, low-cost plan—both in terms of the cost to get it and the recommendations it makes. It avoids risky strategies like picking individual stocks but also recognizes we have a fairly long time horizon and we’re ready to weather some ups and downs in the market.

For some people, a firm like the one I visited on Park Avenue may be ideal. The planners there can help figure out estate planning, trusts, tax strategies. And if you have those kinds of issues, then $5,000 is probably not as big a deal to you. But spending five large on advice is a lot of money to me. It’s also probably overkill. I learned something working at that personal-finance magazine—financial advice is partially sold on the myth that we are all like snowflakes, that each of us is unique and we require bespoke financial plans that account for the particular contours of our financial position.

I’m not that special. I’m part of a two-earner household with two young kids, no credit-card debt, a mortgage, and a habit of spending too much on restaurants from time to time. If you know my income, my assets, and my liabilities, it’s not terribly hard to plot out a sensible financial plan for me. Park Avenue was going to charge me 20 times what NestWise did. Was their advice really going to be 20 times better? Probably not.

So if your life details are common, what are you paying for? You’re paying for coaches and cheerleaders. It’s the same reason people join health clubs. After all, if you want to lose weight and get fit, it’s simple: Eat better and exercise more. But not everyone can do that on their own—they need to pay a gym or a trainer for motivation.

What NestWise has done is retain all the things we seek from a financial planner—judgment, guidance, and enthusiasm—and jettisoned the rest to drive costs down. There’s no Park Avenue lease to pay, no crown moldings to dust. It’s another case of the Internet replacing in-person, brick-and-mortar businesses. And who’s to say the price stops at $250? What if, for $149 or $99, I had access to a sophisticated program that made the same recommendations I once got from a human? Would I even know the difference? (This is the personal-finance version of the Turing test.)

Obviously, there will always be people who want a human on the job. But some of us may not need that. The Internet continues to give consumers tools that used to be restricted to professionals. Think about all the ways you can research mutual funds online or find the best credit card or home loan. Online services like NestWise may not provide as much of the handholding as traditional advisers, but many of us may not need it.

It’s not like other industries haven’t already gone through this evolution. Think I’m wrong? Ask a travel agent.

Grobart is a senior writer for Bloomberg Businessweek and the managing editor of Bloomberg Digital Video. Follow him on Twitter @samgrobart.

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