Should We Pay Personal Capital to Advise Us?

Late last year, we signed up for Personal Capital's free software. Their dashboard provides a quick, holistic view of all our investments, our spending, net worth, the whole shebang. And after a few days, Michelle from Personal Capital emailed me asking if we'd be interested in speaking about our portfolio. I figured there'd be no harm, so we spoke briefly about our goals and our investments. At the end of the call, she asked if we'd like to meet again, and to see a personalized recommendation from Personal Capital. It was free, so why not have a professional view our portfolio and give recommendations?

I should note that we are your typical, passive, index fund investors. We use Bernstein's Simpleton's Portfolio for our retirement accounts, and have a separate asset allocation for our 'Next Home' fund: 50% cash, 30% total bond index fund, and 20% stock index funds. I should also disclose that I am not an investment advisor, and that everything in this post is for informational and entertainment purposes only, and you should definitely not invest as we are, since, let's face it, we're kind of amateurs here. You have been warned.

All that said, here is a high level overview of Personal Capital's recommendation. All the images come straight from the presentation Michelle at Personal Capital provided to me earlier in the month, and Michelle has given permission to use the material here on the blog.

The Breakdown:

Personal Capital is recommending a significantly different asset allocation than we currently have. Though it should be noted that our two separate allocations (one for retirement, one for our next home) complicate matters. We're carrying more bonds than we will after purchasing our rental property, and have barely any alternatives (like commodities or REITs).

Tactical Weighting seems to be the biggest change that Personal Capital is recommending. Rather than buying index mutual funds, like an S&P 500 fund, Personal Capital advocates that we purchase individual stocks and ETFs to achieve "tactical weighting". Their rationale is that an S&P 500 fund is market-value weighted; meaning that certain styles (like large growth) and certain sectors (like technology) might represent too large a percentage of one's portfolio at one time, and increase risk. So the recommendation is to purchase single stocks to achieve a "tactical weighting", that gives each style and sector more even weight in a portfolio, as shown by the blue bars in the graphic above. Below is a historical illustration of their point:

As sector bubbles form and then pop (like the tech bubble in the late nineties), the traditional market-weighted index can go through larger swings than a tactical weighted portfolio. Or so the story goes. Personal Capital also gave a breakdown of how their tactical weighting would have historically performed against the S&P 500:

Here is where my history with companies who sell financial services causes me clam up. We've personally been sold fish oil before, and have paid the price to the tune of five figure losses and four figure, front-loaded fees. And, just on principle, I immediately get anxious anytime someone claims they are beating the market. It's like hearing someone has a great opportunity in multi-level marketing: it's usually my cue to find my coat and head home. Still, Personal Capital makes a convincing argument with that historical performance. I can see the logic of tactical weighting, for the same reason that diversification and rebalancing is a good idea.

Personal Capital also offers tax management services, efficiently placing assets in proper accounts, and using tax loss harvesting to offset gains. Which sounds great, but then there's that scary graphical representation that mutual funds aren't allowed, to be replaced by single stocks. 

The Cost:

At our level of assets, Personal Capital charges 0.95% of all assets under management per year. The charges are applied at one-twelfth of that amount (0.079%) per month. Included with this fee are the costs for any transactions as assets are purchased or sold throughout the year, are re-balanced, or losses are harvested.

Honestly, I am a bit on the fence about the decision. Personal Capital makes a pretty convincing case, and they seem like a great company. I'm not sure whether my hesitation to use their services is driven by logic, or just the natural resistance to change. Personal Capital does not seem like your typical, active management firm -- they seem to be trying to slightly improve on the indexing model. On the other hand, since the fees are based on a percentage of assets under management, the same services become more expensive over time as our net worth grows. What seems like a decent value now might become prohibitively expense in five years. And this represents a pretty significant change to our current strategy of using passively managed index mutual funds as our primary investment vehicle, and doing it all on our own. So I'll turn to you, my excellent readers. Would you consider these sort of services from Personal Capital? Do you already use them for financial advice? 

Michelle did ask that I include Personal Capital's disclosures as well. Warning, legalese ahead: