Tools of the Trading

Jul 13 1998

The first battleground in online investing was price. The second was information. Up next: institutional-quality, real-time investment analysis.

Financial Engines, a Palo Alto, Calif., company started by Stanford University economics professor and Nobel laureate William Sharpe, is rolling out a system that lets individual investors optimize their mutual-fund portfolios. Several major companies, including Netscape, Clorox and the Gap, are letting employees test the software to analyze and adjust their 401K holdings. Corporations will eventually pay $25 to $50 per person per year to use the system.

Financial Engines' software replaces the "How much do you need to retire comfortably?" worksheets, providing tools that let users see the potential profits, losses and relative degrees of risk in their mutual-fund holdings. Using a regularly updated database of mutual-fund investment styles, Financial Engines is able to suggest a portfolio of specific funds that will optimize returns for various levels of risk.

The system effectively mirrors the planning process used by major pension funds. Sharpe himself was one of the originators of modern portfolio theory, and Financial Engines serves as a consultant to the California Public Employees Retirement fund and ATT .

The most interesting thing about Financial Engines, however, might be what its existence says about the future of individual investing. Discover Direct executive VP Thomas O'Connell predicts that at the lowest end of the online investment spectrum, brokerage commissions will fall to zero, and the distinguishing features will be tools and information. As the amount of raw data available grows, what will really stand out are the products that help investors use it.