Fourth in the Thin Mint series of posts
When you come to a fork in the road, take it. - Yogi Berra
My search for a worthy personal finance tool has taken a detour. Previously in this series of posts, I identified objectives and requirements, made a preliminary choice of tool, and tested on real-life data. The top contender, Mint, acquitted itself well versus my "must have" requirements for minimalist monthly money management.
So naturally, I got greedy: could I have my cake and eat it too? Could Mint also deliver on my bonus requirement of offering up useful investment insights? The short answer: no. So I made like a politician and pivoted... to Personal Capital. It did not disappoint.
Step 1: Come On and Tell Me, Who Are You?
Just as any financial advisor would, the Personal Capital app sought to understand my financial situation before giving guidance. Since I had already set it up to access my accounts, the only thing left to do was fill in the Investment Profile with current and retirement age, risk tolerance, savings and spending rates, current savings and investments, and Social Security benefits. It was then ready to weigh in on three aspects of my investments:
stocks (N/A for me)
Step 2: Breakdown, Go Ahead and Give It To Me
The Allocation Checkup compared my current asset allocation to the target allocation Personal Capital recommends for my Investment Profile. Although not unexpected, it was nevertheless a little thrill to learn that my portfolio closely matches what Personal Capital recommends. Its performance is a mere .1% off their target mix. More exciting still, it is well-diversified and lands squarely on the efficient frontier. Translation: a no-longer-practicing CFP® can advise herself nearly as well as a free, 6-year-old piece of software.
Kidding aside, the ease with which the app delivered this insight was impressive. With asset allocation one of the most important predictors of portfolio performance, Personal Capital is delivering a huge bang for the buck here by providing it almost instantaneously at no cost with practically no effort. I was particularly struck when I contrasted this with the amount of time, data entry, and cost required to deliver that information to my financial planning clients a scant 5 years ago.
But let's not get carried away! Since Personal Capital's portfolio assessment is limited to 6 asset classes and little detail about individual holdings, it's not really an apples-to-apples comparison. This analysis does not replace the more in-depth review needed to ensure a portfolio is appropriately allocated, adequately diversified, and comprised of solid investment choices. Nor is it trying to. The app's aim is simply to call attention to red flags and opportunities. With its Asset Allocation module, it delivers.
Step 3: Money for Nothing
Personal Capital's investment cost analysis looks at two of the many components of cost: mutual fund expense ratio and tax efficiency. The feedback here was a bit of a wake-up call, bringing my attention to several funds with expense ratios near or above 1%. As a rule, I am willing to pay a bit more for historically solid investments in more obscure asset classes, especially since I offset those expenses by choosing low-cost index funds most of the time. However, recent industry developments (such as Schwab's shift to super low pricing on index funds) make this a great time to revisit old assumptions about what constitutes an acceptable expense ratio.
Note that the software does NOT include some potentially higher-impact investment costs such as front- and back-end loads, transaction fees, and commissions. As a do-it-yourself investor, I only buy no-transaction-fee, no-load mutual funds and exchange-traded funds (ETFs) from discount brokers, so these other costs do not apply.
Depending on how you pay for financial advice and products, your mileage may vary... a lot. For more details on fund costs than Personal Capital currently provides, check out the Fund Analyzer from the Financial Industry Regulatory Authority. For an overview of the (many!) different kinds of costs, read Vanguard's handy primer.
Step 4: Taxman
Personal Capital also reports on each fund's tax cost ratio and turnover ratio, two measures of tax efficiency. A fund's tax efficiency affects how much of your return you keep (i.e. avoid giving to Uncle Sam) but it only matters for investments held OUTSIDE retirement or other tax-deferred accounts. Personal Capital's ability to group funds by account allowed me to easily zero in on currently taxable investments where tax efficiency is relevant. There were a few, but they fell into the category of not letting the tax tail wag the investment dog. That is, with those funds, I'd made conscious tradeoffs on tax-efficiency to obtain my investment objectives, the higher priority.
So no big revelations for me here, but your mileage may vary... a lot. For those in high tax brackets with money outside tax-deferred accounts, tax-efficient investing is a way to wring maximum returns out of a portfolio without adding risk. The data from Personal Capital is a great start.
Summary: Take the Long Way Home
At this point in the journey, I find myself at a crossroads: Mint or Personal Capital? Sure, Personal Capital works well on the iPad, my target platform, and easily delivers high level investment insights. Beyond that, it also does retirement projections, that analysis which answers the elusive question "Will your money last as long as you do?" This feature, which I'm now realizing I should have listed as a bonus, has been much ballyhooed by other users. I'm anxious to check it out.
BUT let's not forget our real "must have" requirement: tracking cash flow. Personal Capital offers it, but it is reputed to be less robust than Mint's. The question is: is it good enough that, combined with the other features, Personal Capital becomes my vehicle of choice? That's where the road takes us next. Hope you come along for the ride; backseat drivers welcome.
As far as I can tell, Personal Capital offers pretty much the same thing in its mobile and browser-based solutions.
The Asset Allocation analysis uses actual fund data provided by industry standard Morningstar.
I received a response to a Facebook inquiry in under two hours. That's pretty good customer service for a free app.
Past problems setting up accounts seem to have fixed themselves. Even better customer service, or random good luck? Time will tell.