Illustration: Aad Goudappel
By Erika Fry
February 28, 2013

For decades now, investors have benefited from falling costs and the steady march of democratizing forces. First it was discount brokers, then online brokers. More recently it’s been dirt-cheap ETFs.

In the past few years one aspect of this long-term shift has begun to accelerate: online-only brokerages that provide tools for small-time investors to manage and customize their investments in ways they couldn’t before. The number of companies offering such services has more than doubled, from 15 in 2011 to 37 today, according to Corporate Insight, a financial services research firm. The newest crop boasts star founders and directors from the world of tech (former honchos at Microsoft and Benchmark Capital) and Wall Street (Burton Malkiel and Arthur Levitt). “It’s almost like a silent revolution is going on in asset management,” says Auke Douwe Veenstra, an analyst at Forrester Research. “It’s losing its mystique.”

A few of these platforms have been around for years without catching fire — they manage tiny amounts of money — but the latest iterations are ever easier to use and elegantly designed. Here’s a look at a few of the most promising ones.

One type of site features something resembling customizable ETFs. Motif sells bundles of up to 30 stocks each. It charges a commission of $9.95 — but no other fees — and requires a minimum investment of only $250. (Subsequent trades of the same bundles cost just $4.95 a pop.) The brainchild of former Microsoft executive Hardeep Walia, the company assembles baskets of stocks around what it calls motifs: ideas intended to capture an investing thesis or a trend in the economy. They range from plain-vanilla bundles typically found among ETFs, such as dividend stocks, to micro-options like cybersecurity, and cross-industry motifs such as Seven Deadly Sins, a portfolio that posits that even in a struggling economy, consumers will spend money on cigarettes, booze, gambling, and guns. Investors can adjust the quantity of each stock in the portfolio. Motif made a splash at its debut in June, in part because of its prominent names: Sallie Krawcheck, a former Bank of America executive, is a board member, as is Arthur Levitt, onetime chairman of the SEC.

Motif follows in the footsteps of Folio. Founded by former SEC commissioner Steven Wallman, the company has been hawking its “folios” — bundles of stocks, ETFs, and mutual funds that can be bought, sold, or customized in a single transaction — since 2000. It sells more than 100 packaged portfolios organized around geography, sector, asset class, or even valuation. In recent years Folio has begun offering retirement-oriented target-date funds. For a flat rate of $29 a month or $290 a year, investors can swap their securities — or build their own portfolios with up to 100 securities — as often as they want. (Investors can also pay per trade.)

Another breed of online tool aims to make the services of a financial adviser accessible to those who can’t afford one, and obsolete for those who can. Betterment is the simplest and cheapest of these outfits: You put your money in and answer a few questions about financial goals, and Betterment’s software handles the rest (including periodic rebalancing). The firm allocates investors’ money into low-cost equity and bond ETFs from Vanguard and iShares according to your objectives. Say you want to save $200,000 for your child’s college education 15 years from now. Betterment will put 70% of your money in equity ETFs and the rest in bond ETFs. You can tinker with the allocation too. There’s no minimum investment and fees range from 0.15% to 0.35% (the larger the account, the smaller the fee) on top of whatever the underlying ETFs charge. The low-cost, no-barriers nature makes Betterment an option for the young and less affluent. The firm has roughly 30,000 accounts and $145 million under management.

Wealthfront’s online tool uses risk-assessment algorithms to spread investors’ money into six asset classes of low-cost index funds. For example, a 50-year-old who invests $50,000 and has a risk tolerance of four on a scale of 10 would have 44% of his money apportioned to a Vanguard bond ETF, 20.5% in a Vanguard U.S. equity ETF, 16% in a Vanguard international equity ETF, and the rest in real estate, emerging markets, and natural resources funds. The minimum investment is $5,000, and fees are 0.25% for investments larger than $10,000.

The company, which is headed by Benchmark Capital founder and Stanford Business School lecturer Andy Rachleff and is in its third iteration (the first was called KaChing), targets the young, moneyed denizens of Silicon Valley, who, he says, are happy to hand over large chunks of cash to technology. “We don’t think we’re going to appeal to the 50-year-old investor for a while,” says Rachleff. “They want to talk to someone. For many people under 40, there’s nothing they want less.” Wealthfront has 2,100 accounts and manages assets of $130 million. Economist Burton Malkiel came onboard in November as chief investing officer. Like Levitt, a lion of the old investing world, Malkiel sees the value in simple and inexpensive methods that allow regular folks to gain access to broad swaths of the markets.

This story is from the March 18, 2013 issue of Fortune.


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