“The investor’s chief problem—and even his worst enemy—is likely to be himself,” Benjamin Graham, the Columbia University financial expert who was Warren Buffett’s mentor, wrote in 1934. It’s a fact confirmed by academic research. But important developments in computer technology and financial theory, when harnessed by entrepreneurial companies, may help people help themselves.

To understand the problem, consider a recent study by professors from Harvard, Yale, and the Wharton School at the University of Pennsylvania. The researchers presented Wharton students with a choice of index mutual funds whose main distinguishing feature was fees. Although the funds were roughly equivalent, the students still chose to purchase those that charged higher fees, even though this meant they were almost certain to earn less money over time.

If Ivy League business school students don’t make optimal investment choices, what hope is there for the average investor?

One Nobel Prize–winning economist believes all is not lost. In the mid-1990s William Sharpe founded Financial Engines, a Web-based investment advisory company to offer advice and portfolio management to keep clients from falling into the traps that behavioral economists see them setting for themselves.

If Ivy League business school students don’t make optimal investment choices, what hope is there for the average investor?

Sharpe is a rare combination of serious computer geek and financial market genius. After stints at the Rand Corporation and the University of Washington in the 1950s and 1960s, where he studied computer science and capital markets, he landed at Stanford University. He was awarded a Nobel in 1990 for his work developing the Capital Asset Pricing Model (CAPM), a sophisticated way of pricing an individual security or a portfolio.

Throughout his career, Sharpe has put his academic theories into practice. For example, while at Stanford, he was a consultant to Wells Fargo, where he helped develop the first stock index funds—that is, portfolios that reflect the ups and downs of the entire market, or large segments of it.

Early on, Sharpe understood the potential of massive computing power and the Internet to change financial services industries, particularly for middle-class investors. The rise of the Web in the 1990s coincided with the explosive growth of 401(k) individual retirement plans. Over the past few decades, the burden of retirement planning has shifted from managers of corporations and pension funds to individuals themselves.

In response, Sharpe founded Financial Engines. According to Peter L. Bernstein, author of Capital Ideas Evolving, the firm “uses a computerized program, based on Sharpe’s contributions to portfolio theory and asset pricing…[and] provides individuals with the same kind of sophisticated advice long available to institutional investors.”

The software asks you to enter your age, risk comfort level, expected retirement age, current investments, and desired income at retirement.

The technology runs a sophisticated “Monte Carlo simulation,” a tool for modeling potential outcomes under conditions of risk and uncertainty. According to Bernstein, with the simulator “your data and a wide range of many different future rates of return on financial assets, interest rates, and inflation are combined in thousands of calculations, each representing a different scenario for the asset classes, interest rates, and inflation.”

Investors are told bluntly the likelihood they will realize their goals. This turned out to be a depressing experience for me; looks like I won’t be retiring at 55 after all.

Financial Engines will also tell you how outcomes would change if you were to alter the underlying assumptions, such as amounts invested each year. It makes a host of recommendations, such as altering the makeup of your portfolio to increase the likelihood of meeting retirement objectives. Financial Engines takes into account fees and other costs that depress investor returns and will alert you if you are not optimizing your portfolio compared with other options. If you want, it will offer a personalized portfolio for you to pursue.

Investors are told bluntly the likelihood they will realize their goals. This turned out to be a depressing experience for me; looks like I won’t be retiring at 55 after all.

A decade after its founding, the service is available with the 401(k) plans of employees of “half of Fortune 20 and 100 of the Fortune 500 companies,” says Financial Engines CEO Jeff Maggioncalda. The plan sponsors pay Financial Engines to offer their services to their employees. “We currently help 6.2 million employees” manage their portfolios. The privately held firm claims revenues are growing between 25 and 50 percent a year.

Financial Engines has also begun managing accounts for individuals. For a percentage of their assets under management, employees can have the firm make investment choices for them. The technology models over 26,000 individual securities, mostly stocks and mutual funds, says Chris Jones, chief investment officer for the firm.

Maggioncalda says this portion of the business is doubling every year. The firm currently manages over $11 billion in assets, but that’s only a few tenths of a percentage point of the value of American retirement vehicles, so the potential is huge. Firms such as Merrill Lynch are already offering similar products, so competition is building.

So what’s the comparative advantage? In addition to customization, Financial Engines stresses its independence and lack of conflicts of interest.

The biggest competition, as Jones sees it, comes from investors who want to go it alone. But if the experience of the Wharton students is any indicator, some objective counsel could come in handy.

Either way, technology and markets continue to work miracles. Not too long ago, only the wealthy enjoyed customized financial planning advice. Now it’s open to anyone with Internet access.

Nick Schulz is editor of TCSDaily.com.