For the monthly fee of two Frapuccinos ($10), SigFig will design you a professionally diversified portfolio, monitor it, and automatically make the necessary changes to keep it on track. Competitors to SigFig include Betterment, Jemstep and Wealthfront. All of which offer software-based financial advice as a substitute to expensive financial institutions and private wealth managers.
The purpose of SigFig is to “fix” your portfolio by reducing fees and minimizing risk. Most of us have an IRA, a 401(k), or even a trading account. Yet, not all of us have ...
the time, knowledge or experience to coordinate our investments into a portfolio that is designed to balance our financial goals and our appetite for risk. “That is why mutual fund managers and private wealth managers make the big bucks,” you might say. True, but you may be better off without them. Even highly-trained fund managers backed by huge financial research teams struggle to beat the market and only a handful do it consistently. The vast majority do just as well or worse than indexes, such as the S&P 500, which are composed of the majority of the assets in a given market.
SigFig, and companies like it, claim the investment decisions made by professional investors are based on a broad set of principles that with the right data and software can, to a large extent, be automated. The idea is that picking the right stocks and timing the market to buy and sell at the right time is extremely difficult. Instead, they argue, you should pick asset classes as a whole, such as stocks, bonds and real estate, based on the overall risk level you want for your portfolio.
How Does It Work?
The first step is to link all your current investment accounts with SigFig. You can then see all your investments in one place and SigFig will automatically update your overall balance. The second step is to risk level, which will determine what is your optimal portfolio.
SigFig does this through a questionnaire that asks about your income, age, assets, and personality. The questionnaire includes classics like “how would your best friend describe you? As a risk taker? A real gambler? Willing to take risks after completing adequate research? Cautious? Or a real risk avoider? Or my personal favorite: if you were about to go on the vacation of a lifetime and you lost your job, would you a) cancel the vacation for a full refund; b) go on a cheaper vacation; c) go as planned, might as well take a break before job hunting; or d) extend your vacation, this might be your last chance to travel first class?
Once your risk level is set, SigFig applies Nobel-prize winning portfolio and asset research by Markowitz, Sharpe and Fama to determine the ideal mix of assets for your portfolio. It then uses commission-free Exchange Traded Funds as building blocks to setup the perfect asset allocation for your portfolio. ETFs provide excellent diversification for a small fraction of the cost of managed funds.
SigFig has agreements with major asset custodians, such as TD Ameritrade, Schwab and Fidelity, which allows it to automatically implement changes to 70% of its customers' portfolios, according to SigFig's CEO, Michael Sha. Customers who don't have an account with one of SigFig's partners will have to change accounts.
Elegant design and a simple pricing structure are two features that help SigFig stand out from the competition. The website is well-designed, keeps jargon to a minimum and makes linking your investment accounts with SigFig's platform painless.
SigFig's strength may also be its weakness. The questionnaire used to determine your risk level may be effective at determining our psychological attitude to risk, but that's not the only thing that determines our investment decisions. There was no mention in SigFig's questionnaire about whether I was saving for my children's college education or whether I was going to use my investments to pay for a down payment on a house. All these are factors that determine how aggressively we invest. If you only use your investment accounts as retirement accounts or you are comfortable with adjusting your risk level to your mid- and short-term goals, SigFig works just fine.
Free for 6 months. After that, they charge 0.25% per year.
Most of the competition, such as Wealthfront and Betterment, also base their fee on a percentage of the assets managed. These fees range from 0.15% to 0.35%.
Companies like SigFig, Wealthfront, Betterment and Jemstep provide an excellent alternative to paying finance advisors and mutual fund managers inflated fees by using the power of index fund trading and portfolio risk management. SigFig is backed by the biggest players in fund management, which makes linking accounts a breeze. Know that not all accounts can be managed remotely, so you may have to switch your business to one of SigFig's partners.
SigFig offers one of the cleanest and simplest platforms to use, with pricing that's competitive and easy to understand. However, it doesn't take into consideration some important life events that may change your attitude toward risk.