Smaller Investors Don't Have to Skimp on Services

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Much of the financial services industry is geared toward high-net-worth individuals. But smaller investors can still get the services they need, too, and at an economical price. I'm here with Christine Benz, she is our director of personal finance, for her take on how.

Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here.

Glaser: So, let's start big picture. Why do small investors need to economize when it comes to finding these services?

Benz: Well, this simple fact is that they have less room for error in their plans. So, if you have fewer dollars to put to work in the market, that means that you have less wiggle room. You need to really keep an eye on what you pay for your investments, as well as what you pay for any advice, as well as what you pay for any information. You really need to watch your outlays every step of the way.

Glaser: So, let's look at one of those first steps, which is finding free sources of education. What are some good places to look for some basic advice?

Benz: There's so much great information online and in your public library that would all be free. Obviously, I'm partial to the free resources we have on Morningstar.com. We have lots of tools, lots of free articles. My articles are all part of the free site. So, my bias is to start there. But there are also a lot of other purveyors of great educational resources. One website I often recommend is Bogleheads.org, the Wiki site, includes a lot of detailed information on investment vehicles, investment strategies. That's, I think, a nice complement to some of the information we provide on Morningstar.com.

The financial services providers--of course, you want to watch out for bias that might creep into any of their educational advice or other recommendations--but generally speaking, that is a good source of fully vetted information. If you find something on Fidelity's site or Schwab's site about tax planning, for example, you can pretty well bet that that is good information, that it's not just coming third-hand from someone who may not know what they are talking about, because as much as there are great free resources that have been fully vetted, you do need to be careful about who you trust for information. So, do take a discerning eye if you're taking in information from online resources. But there are certainly lots of great free resources available.

Glaser: One of the big questions for any investor is setting an asset allocation. What's a good way for a smaller investor to get some of that advice cheaper or free?

Benz: I have a couple of recommendations here, Jeremy. One is the target-date fund. That is a fund that is kind of pre-packaged to match your time horizon and pre-packages some investments that are well-suited to someone with your approximate time horizon. That's a starting point. Not all target-date funds are good, of course, but I do think that they are certainly better than nothing if you are not sure how to approach your asset allocation. And some of the target-date funds in my view are very, very good and suit a lot of different investors in many different situations. So, that's a starting point.

Another option that maybe available to you is some sort of a managed account option that might be available through your 401(k), where you give the 401(k) provider a little bit of information about yourself, perhaps about your total portfolio, not just what you have within the 401(k), and then you can get some customized guidance based on what you've told the 401(k) purveyor about your particular situation. That's another idea. There may be a small charge for that type of advice or that might be something that your employer is paying for, for you. So, read the fine print on that. But that can be something worth checking out.

Another thing I would say that investors might check out would be so-called robo-advisors that, for a fee--and these fees do vary based on the provider--you can get some customized asset allocation guidance. But my bias would be to exhaust the free sources of asset allocation guidance first before you pay up for it.

Glaser: We often talk about the value of financial planning advice, things like side portfolios, estate planning, asset allocation, tax planning. If a lot of advisors maybe are looking for high-net-worth clients when they are giving out this advice, what would be some solutions for someone who doesn't have a million-dollar portfolio?

Benz: Yeah. You definitely have to discerning as a small investor when seeking advice. As you said, Jeremy, there are some advisors who won't see you if you have less than, say, $1 million in assets to invest. Well, a lot of smaller investors don't have that much to put to work. But do your homework. One model, one business model that I really like for small investors is the hourly financial planning model. And the idea is that you are kind of on the clock with the advisor or with the planner. So, it pays to do your homework, to come in with all of the information, to do some work in advance. But even if you have to write that check to the planner, that may well be more economical than paying for your advice as a percentage of your assets on an ongoing basis.

The reason the hourly model can be so economical is that if you see the advisor and maybe you spend, say, eight to 10 hours or the planner spends eight to 10 hours on your plan and on giving you advice, you may not need to see that person for another, say, five years until your situation changes, until you have more questions. So, even though people, I think, are kind of allergic to this idea of writing the check, ultimately that can be the most cost-effective way to pay for planning advice.

Glaser: One of the issues that small investors sometimes run into are high minimums on investing in a fund. What are some options of looking for investments that are going to have low or no minimum investments?

Benz: Here I think index funds and exchange-traded funds can be the small investors' best friend. So, not only do many of them have very low costs, but also some of them are available with very low minimums. With many ETF purveyors, for example, you just need to be able to pony up a single share. Some of them may have higher thresholds. They may actually have a dollar amount threshold in order for you to transact on that platform without having to pay a fee. Schwab, I think, stands out as the very small investor's friend in that for just $1 minimum or maybe even a zero dollar minimum you are able to get into some of Schwab's core index fund products and those products have very low costs associated with them.

Do your homework, read the fine print on expense ratios. But the good news is that there have been price wars among some of these index fund and ETF purveyors, and that's been great news for consumers--not just consumers without huge portfolios, but consumers with larger portfolios, too.

Glaser: Christine, thanks for walking us through some tips on saving money while being a smaller investor.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.