RetireHub, Get Smart About Retirement

MarketWatch columnist, Robert Powell, wrote an excellent article about the limitations of the probability models that are often used in investment software (including our own).  Our CEO, Sunil, shared some of his thoughts with Robert, which were published in the column.  His suggested improvements offer hints of enhancements come from RetireHub.com.

You can real the article here.

The RetireHub.com offices are a bustling with activity these days.  Here is a quick update on some of the things we have going on.

We have recently been piloting the RetireHub.com service at one of the largest private universities in the country.  During the pilot, we conducted focus groups in which randomly chosen employees of the university were provided with an overview of RetireHub.com and then asked to share their impressions with a moderator.  A few of us got to sit-in on the discussions and we found them very energizing.  Assembling people to discuss real retirement investment issues provided for us a first hand demonstration of the clear need for affordable retirement investing advice and literally put a face on our future customer base.  We received some great suggestions for improving the web site and we found out which features resonate most with potential users.  Overall, people thought RetireHub.com was easy to use, appreciated the fact that it was independent and really liked having the ability to aggregate their accounts into a total portfolio view.

We are more excited than ever about the future.  With the thoughts of our customers in-hand and the devastation wrought on retirement portfolios by the financial crisis fresh on our minds (we have been victims too), we are giving a lot of thought to how we might innovate our investment advice.  Specifically, we are giving consideration to how some of our more risk averse users can lock-in a retirement income without relying on the stock market at all.  As you might guess, this may lead us to give some advice you aren’t likely to find anywhere else.  That is our hope.  Furthermore, unlike the advice you might receive from other sources, you can be confident in our advice because you understand it, not because we ask you to take a leap of faith.

The Bear Market of 2008 has dealt a tremendous blow to the confidence of millions of people saving and investing for retirement. Everywhere you look—whether on-line, on TV or in print—an attempt is being made to respond to the primary question investors have on their minds: “What should I do now?” Clearly, many are confused. It is a stark reminder that a lot of Americans have chosen to “go it alone” when it comes to retirement investing and planning, rather than seek professional investment advice. Equally apparent is that plenty of investors lack the experience, knowledge or tools required to build an investment plan in which they can have the utmost confidence.

In light of the uncertainty and trepidation people have around planning for retirement, why are they so reluctant to seek professional advice? We have a few ideas:

They don’t have enough assets.
Having a person designated to advise you on how to invest your money has long been perceived to be a luxury reserved for the wealthy. Although some financial services companies have created advisory services for the mass affluent in recent years, account minimums can still be as high as $100,000. That threshold can eliminate a lot of people, especially if you hold the bulk of your assets in an employer sponsored plan (where it is usually “self-managed”). Furthermore, it certainly eliminates those who are just starting out.

It’s too expensive.
It is not uncommon for investment advisors to charge a fee of 1 ½% of your total assets or more. That means if you want someone to advise you on a $100,000 account, you will be paying them at least $1500 a year for the privilege. Although “peace of mind” comes with the price tag, it may also be very unsettling when you consider how much the fee can reduce investment returns, especially over the course of a lifetime of saving.

Trust—they can’t always be sure their interests are coming first.
These days, a significant amount of investment advice is provided by a person or entity that will likely profit from selling the investment products used to execute the advice. This can result in a conflict of interest because the advice they provide is built around the products they are incentivized to sell rather than the needs of the individual. This is not to say these providers are not providing investors with sound investment strategies. However, retirement planning decisions, like many other decisions in life, are not always black and white. Therefore, investors cannot always be sure they are getting the best solution when it comes to the grey areas.

They don’t want to relinquish control
The challenge to accumulate enough assets to ensure security for an unknown period of time at the end of your working career is a personal one with the burden of failure or spoils of success falling on the individual. For this reason, many believe that while you can outsource the math of the problem, you can’t outsource the objective judgment or even the zeal and passion required for such an important and personal plan. Those who are overwhelmed with investment decisions are likely to believe a professional is warranted (although they still face cost and trust issues). But there are others who view retirement planning as a “do-it-yourself” project (making them much less likely to be willing to pay or trust anyone). It is true that someone with a moderate amount of investment knowledge can piece together a workable strategy by devoting an ample amount of their leisure time to the issue. However, they often lack the tools to be precise and the discipline to develop a long-term plan.

We’re familiar with many of these frustrations because they, in large part, are the impetus behind why we formed RetireHub. Our goal is to empower individuals to take control of their own retirement plan at a very reasonable cost. For those lost in the retirement planning maze, RetireHub is easy to use. For those who wish to be hands-on, RetireHub offers precision and control. Most importantly for everyone who wants to be confident in their plan for retirement, RetireHub is unbiased, comprehensive and sophisticated.

RetireHub is leading a revolution in how investment advice and management is delivered to the consumer. RetireHub is changing the landscape of investing for the average individual.
Our application has been built on four important concepts:

1. Low cost and efficient
2. Independence
3. Investment sophistication delivered via technology
4. Personalization of recommendations

Low cost and efficient
We prefer indexed and low cost mutual funds or ETF’s to provide the allocation to asset classes. We do not make claims on selecting the “Best in Class” funds but look to a sensible low cost solution that provides passive or management approach. We look for the most cost effective solution for the consumer given his/her account size, account type, and fund availability. We avoid funds that have transaction fees and try to maintain a least cost program for the consumer. Our investment recommendations are pre-selected to match the consumers’ financial institution.

Independence
We are not a “mutual fund” company. We do not sell a product. We provide a service to the consumer on how to build a sensible investment account. We do not take or receive any revenue from the mutual funds we recommend.

Investment sophistication delivered via technology
There may appear to be many technology driven solutions. However, these solutions will often lack the first two advantages listed above. The investment techniques which are employed in the RetireHub engine are used by investment professionals at the most sophisticated asset management companies.

Personalization of recommendations
With RetireHub, the consumer has control. He or she can steer clear of being sold expensive and unnecessary products about which they have little knowledge or understanding. The RetireHub personalization and recommendation engine maintains a simplicity which is compelling from the most unsophisticated to the more knowledgeable consumer. Investment products, portfolios and analytical recommendations are personalized to the consumer’s personal preferences and life circumstance.

Summary
RetireHub’s investment personalization and recommendation engine is simple for the consumer, but sophisticated in its implementation. RetireHub gives everyone the opportunity to invest in a sensible and straightforward way. With RetireHub, you do not need to have hundreds of thousands of dollars. With RetireHub, the small investor can access affordable and personalized investment advice which until now has been the privilege of the affluent.

Bill Miller of Legg Mason and famous for his string of calendar years of beating the S&P 500 is having a rough time. Year-to-date through June 12th, Legg Mason Value Trust is down over 23% versus the S&P 500 loss of 8%. His 32 stock portfolio is invested heavily in financial services, home builders, and the consumer services. Most of his holdings experienced severe losses. Bill Miller, a good fund manager over the long run, has had bad things happen to his fund in the short run.

Another very well known investor, Warren Buffet has had his share of bad times. With his value orientation, Warren Buffett was practically pronounced dead when the tech bubble was in full bloom in late the 1990’s. Buffet’s Berkshire Hathaway was a sluggish and stagnant investment while other funds were soaring with hefty technology bets. Thankfully for Buffett’s investors the bubble collapsed and Berkshire Hathaway was once again on top.

So here is the question, what can be expected from the mortal investor?

Miller and Buffett and others like them are paid to manage and to provide superior returns compared to an index. Based on historical data, Miller’s Legg Mason Value fund could be expected to outperform or underperform two thirds of the time by 8 percentage points. This means that if you invest in this type of fund, you will be either very happy or very sad.

Remember that fees for active management are not a guarantee that the fund will provide you a better return. You are simply paying for the POTENTIAL of outperforming an index.

There is an alternative to the angst and emotional upheavals of actively managed funds. You can choose not to play this game of trying to beat the markets by just investing in a low cost index fund and receive roughly the same return as the market. What you get is no additional volatility from outperformance or underperformance, only the pure volatility that the markets deliver.

In fact, many of the most sophisticated and largest pension plans and endowment funds do not spend money, time and energy trying to outperform most of the US equity market. They invest in very low cost index strategies to gain exposure to the asset class. Their funds are large enough to invest in strategies and asset classes that are not available to the average retail investor.

At the Berkshire Hathaway Annual meeting, Warren Buffett said that the single best investment that someone in their 30’s could make would be in a low cost index fund from a reputable firm. Buffett has great investment intelligence and perception. For those who love to hate Microsoft, Buffet ousted his good friend, Bill Gates, as Forbes Magazine’s world’s richest person in 2008*.

As far as investing is concerned, I would take Buffett’s advice any day.

*Side note on Forbes Magazine’s billionaires for 2008: only 2 out of 10 are from the United States.