Many financial advisory firms offer tools that,with a few quick questions, provide you “advice” as how to divide your money between different categories of stock and bond funds. I tried several of these tools, including the one offered by Ameriprise, to see if they could provide helpful advice.
I will say that the process was quick! My age (37), my current assets ($1 million+), my savings per year ($0 – I just started Learn Bonds, I am not taking a salary), the income that I currently need as a percentage of assets ($0 – this was more complicated, my wife and I live on about $70,000 per year. Hopefully, I will be able to make this from Learn Bonds within a year, if not I will need to use income from my investments.), risk tolerance (5/10 – I really don’t know what the risk tolerance number means, but to complete the form, I had to fill it out.), economic outlook (5/10 – I actually don’t have an economic outlook. I can tell you all about Learn Bonds outlook which is bright but, I don’t know where the US economy is going.)
And I got the following results:
|Suggested Asset Allocation|
|Large cap stock||23%|
|Mid cap stock||21%|
|Small cap stock||16%|
My initial reaction was that this was not very useful for making asset allocation decisions for buying bonds or bond funds. While this model gives four different categories for stocks (large cap, mid cap, small cap, foreign), it only gave two choices for bonds. What does putting 7% of one’s assets in bonds mean. Should I put it in junk bonds, short-term government or one of the many other categories of bond funds? This problem is shared by most of the other online asset allocation tools, except some of them replace the municipal bond option with a foreign bond allocation. My initial complaint was that these online asset allocation tools did not provide enough detailed suggestions to make their suggestions actionable.
However, that actually is the smaller problem with these tools. They give the impression that they are providing advice specific to you. However, as you saw above, I have no idea if the portfolio matches my risk tolerance or takes into consideration that I don’t have a strong economic view, or that while I don’t need income now, I might very soon. Everyone has a unique tax situation, financial goals, and life situation. A questionnaire is not a great way of capturing this information. However, I supposedly got investment answers that were tailored to me. I wouldn’t trust them.
Do the results have any value?
Yes, I think they could serve as a starting point for a discussion with a financial advisor, once they have a chance to make recommendations on portfolio asset allocation. Every financial financial advisor should be able to answer the question, “why is my asset allocation different than this one?” Instead of asking it based on a portfolio suggested by an online asset allocation tool, I would use the 60% stock / 40% bond portfolio which is good portfolio for most people, providing stock market type returns with a lot less risk.
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