A free lunch on Wall Street? If you're looking to evaluate your financial-planning strategy without shelling out big bucks for professional advice, you may need only seek out your friendly broker. Some securities firms and mutual-fund companies are offering a wealth of free services to help you plan for such epic events as paying for college, funding your retirement, and putting your estate in order.
It's true the companies have devised these programs to entice you to invest in their mutual funds, annuities, and other financial products. Nevertheless, you can learn a lot from them about how to handle your investments--without any obligation to buy. "The advice is going to be generic, by definition," says Don Phillips, publisher of financial journal Morningstar Mutual Funds. "But in getting people used to thinking about appropriate diversified investment, it serves a valuable function."
The programs, which can help seasoned investors as well as novices, go under such names as Shearson Lehman Brothers' Strategic Asset Allocator and the Dreyfus Rollover Decision Analysis. Say your company has a tax-deferred 401(k) retirement plan and you're not sure what investment options to choose. These programs can help you decide how to distribute your 401(k) savings. Or you may simply want to check your assumptions against the various computer models.
You don't have to be a customer to take advantage of these services. At Shearson, Merrill Lynch, Prudential Securities, and PaineWebber, you simply call to set up an appointment with a financial consultant. In the office, you'll fill out a brief questionnaire about your financial history and goals. "There may be only six questions, but some of them are really hard," says Shelley Freeman, Shearson's director of Personal Financial Planning. "Ranking your priorities is a pretty thoughtful process."
After the consultant feeds your responses into a computer, you'll get an elaborate printout that includes up to 10 columns of data listing income, investments, and shortfalls, all projected out to the middle of the next century. Pie charts show the actual breakdown of your investments vs. how they should ideally be distributed. With this information in hand, you and the representative can review the numbers.
By comparison, Dreyfus goes through this process by mail. After you send in your questionnaire, you will receive a written analysis of the results. T. Rowe Price Investment Service, which specializes in retirement planning, doesn't run your numbers through their computer but instead sends you free workbooks that let you do the calculations yourself. You can then discuss your results with the firm's adviser.
While the processes are similar and look scientific, the different biases of each company leave plenty of room for interpreting the results. A firm with a more conservative bent may recommend keeping a larger portion of assets in cash for emergencies and less money in stocks. Dreyfus doesn't break down its distribution recommendations into fixed percentages, as other companies do, but offers ranges that give the individual some personal discretion.
RISK TOLERANCE. At the heart of many free programs is some type of Asset Allocation 101--an elementary course in how to slice up a portfolio among stocks, bonds, and cash. For instance, one 40-year-old woman was worried that her tax-deferred retirement savings weren't growing fast enough. So she fed her data into Shearson's Strategic Asset Allocator program, which printed out a picture of her retirement assets: 52.6% in a bond fund, 31.6% in an equity fund, and 15.6% in a money market. It suggested that she increase her stock holdings to 65%, because equities deliver the highest returns over time, and cut her bond investment to 35%. It also encouraged her to eliminate the cash component altogether, since she can't touch the money until she retires and doesn't need the liquidity now.
How the computer reslices your pie depends on your risk tolerance and your age. A 40-year-old can ride out fluctuations in a retirement account and so is urged to invest more in equities. But the allocation program would steer a 60-year-old, who will soon be living off savings, into more conservative bonds and liquid money market funds.
Financial-services providers can also draw you a road map to funding your child's college education. The printouts pro-ject how much college will cost for the four years your child is there, how much you'll have to make before taxes to cover it, and how much you'll need to put away now.
Merrill Lynch's CollegeBuilder program uses the hypothetical case of 29-year-old Joe College, who is in the 28% tax bracket and has a one-year-old daughter. When she goes to college in 2010, the average cost for a private university will have grown by 7% a year, from $14,403 today to $48,681. Joe will have to make at least $72,345 before taxes to cover that.
The program calculates that he would need to invest $12,233 today in Merrill's version of a zero-coupon bond, called a TIGR, to meet college costs in 2010. "TIGRs are a traditional way to do long-term investing because they're safe, and you know exactly how much you'll have at any point in the future," says John Wellington, an assistant vice-president.
Of course, you don't have to buy the Merrill product. Armed with this advice, you could buy any zero you want. Likewise, you don't have to invest in a T. Rowe Price mutual fund just because you use the company's Retirement Planning Kit. The kit can help you figure out how much money you will need to stash away each year to afford a retirement income that is 60% to 80% of your yearly pay at the end of your working life. Depending on how long you live, you may have to sustain this income for 25 years or more.
The kit contains a workbook that allows you to do the calculations at home without waiting for the results. It also includes general information about retirement, as well as an introduction to T. Rowe Price's mutual funds and how they might help you.
The company has answered 376,000 requests for the Retirement Planning Kit since it first came out at the end of 1989, says Vice-President Steve Norwitz. For $15, you can get an easier and more engaging computer version called the Retirement Planning Kit for PCs, also from T. Rowe Price.
`FREE MAKE-OVER.' Retirees may be particularly interested in programs that help them decide how to handle withdrawals of tax-deferred retirement funds. Shearson, Merrill Lynch, Dreyfus, and others will calculate the options, comparing, for example, the tax consequences of taking out an entire lump sum vs. using five- or 10-year income averaging.
All this free advice can be intimidating. It might be hard to turn down a product someone is selling when they've just taken the time to customize a financial plan for you. And it's tempting to think that the first guy with the first program can solve all your portfolio problems. "It's like the free make-over that gets you in the door," says John Markese, president of the American Association of Individual Investors. "My fear is that, like free seminars, people don't realize there is a bias and a pitch."
As long as you do understand that, there's important knowledge to be gleaned from these services. "Anything that gets you thinking about what investments to make to attain certain goals is providing a real service to the client, and I applaud that," says Norman Boone, a San Francisco financial planner.
So arm yourself with some healthy skepticism and learn as much as you can. After all, the price is right.