Personal Finance May 28, 2010, 9:01PM EST

Online Investing Tools Refine the Personal Touch

Businesweek.com's latest look at online tools for individual investors reveals innovative new features for the do-it-yourself set

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A year after the worst financial crisis in 80 years shook investors' confidence, mounting fear of contagion from Europe's debt crisis and rising market volatility offer fresh reminders of the need for greater vigilance. Investors and consumers may find it wise to adopt a hands-on approach in managing their personal finances and retirement accounts.

There is no shortage of resources for the do-it-yourself crowd. In its latest look at tools and technologies for individual investors, Businessweek.com examined nine websites (see slide show) that specialize in a range of areas, from actively managed investment portfolios and asset allocation advice to analytical stock research and personal finance. Whatever the topic, it is clear that there's a growing hunger for better ways to deal with money.

On kaChing.com, active investors get access to 16 different professional money managers. Their accounts can be as small as $3,000, vs. the minimum of $500,000 usually required by the managers' firms, and they pay ultra-low trading commissions because managers split commissions for each trade among all the clients who subscribe to their model on a pro rata basis.

Managers on kaChing get an investor IQ rating that takes into account how closely they stick to their stated investment style, their risk-adjusted returns (which weigh the performance of all their holdings separately), and the soundness of their investment strategy. An investor IQ must be at least 140 on a scale of 1 to 200 for a manager to be listed on kaChing.

This is a much more innovative way to measure a manager's skills than what's provided by the mutual fund industry, where no one can see what transpires in a portfolio between quarter-end dates, says Andy Rachleff, kaChing's co-founder and chief executive officer.

the downside to five-star funds

"Lack of transparency leads to an inability to develop a compelling ratings system," Rachleff says. "Without transparency, the only way to evaluate a mutual fund is on past returns, which aren't indicative of future returns," he says.

Once they have received a five-star rating from mutual-fund data provider Morningstar (MORN), mutual funds on average underperform the broad market, says Rachleff. When the influx of money that often results from Morningstar's highest rating has to be put to work, it tends to get invested in stocks that fund managers are less convinced about in order to avoid 5 percent ownership in the equities they already hold. (Owning a 5 percent stake in a company requires a more detailed level of financial disclosure to the Securities & Exchange Commission.)

Manager fees on kaChing average 1.25 percent of an investor's portfolio value, and one-quarter of the fee goes to the site. Investors also pay trading commissions on top of that, but commissions on an average account size of $10,000 tend to be 70¢ per trade, vs. the $7 to $10 you'd typically pay an online brokerage such as Charles Schwab (SCHW).