Robo-advisors have taken the world by storm since the financial collapse of 2008. Blending technology, passive investing techniques, and ease-of-use, robo-advisors offer financial portfolio management at low costs.
Robo-advisors are growing at a staggering rate as younger generations continue to pile into the investment world.
FutureAdvisor (FA) is a front runner of the robo-advisor world. A top 10 by assets under management, this advisor was created to be layer over your investment accounts.
FA was on a profitable course until late 2015 when it was bought by BlackRock, forever altering its destiny. Still a key player, FA continues to offer services to a core offering. Read on to learn if this robo-advisor is for you.
Account Minimum: $10,000
Fees: .50% /year
Promotion: Sometimes offer 3 months free
What is FutureAdvisor?
FutureAdvisor is a leading player in the burgeoning robo-advisor space. Based out of San Francisco, this robo-advisor rose to prominence after completing the famed Y Combinator in 2012.
Neither glitzy nor glamorous, FA has attracted a dedicated following. With total assets under management (AUM) at roughly $1.1 billion in 2019, FA fulfills a specific niche (and for those less technologically inclined). What FA does it does well — more on that below.
Before we get to the company, let’s look at just what a robo-advisor is. For the answer, we’ll turn to The Concise FINTECH Compendium.
“A Robo-Advisor is a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums, employing portfolio management algorithms.”
Robo-advisors exploded onto the mark in 2008 in the wake of the global financial crisis. They were created to address the high cost of portfolio management and to offer investors more control and a new approach to investing.
Not without disadvantages, robo-advisors are poised to continue their meteoric rise as more and more investors look to the benefit from technological innovation.
Business Insider Intelligence forecasts robo-advisors to be managing $1 trillion by 2020 and $4.6 trillion by 2022.
FutureAdvisor was originally founded in 2010 by two former Microsoft employees, along with two early hires: Bo Lu, Clyde Law, Jared McFarland, Jon Xu.
The brainchild of Lu and Xu, the team conceived of FA when friends and family continued to ask for help with their finances.
The pair departed Microsoft and applied to the Y Combinator, San Francisco-based seed accelerator known for catapulting startups forward.
They were accepted and completed the prototype, which attracted early adopters and interested investors. From 2010 on, FA grew, attracting five rounds of funding within four years.
One such investor was venture capital firm Sequoia Capital, an early backer for firms like Apple, Google, Paypal, Instagram, and WhatsApp.
Mammoth global investment management firm BlackRock, Inc. snapped up FA for roughly $150 million in the summer of 2015.
Variety of account types. Taxable, IRA, SEP IRA, Coverdell, Joint, Rollover IRA, Roth IRA, 529, 401K.
Keep your money with trusted firms. Financial accounts are held with leading brokerages Fidelity and TD Ameritrade.
Lower fees compared to traditional financial planners. 0.50% annual fee of assets directly managed (charged quarterly at 0.125% of assets directly managed).
Domestic focused. Oriented towards domestic investments rather than international and emerging markets.
Reasonable Exchange Traded Fund (ETF) rates. Average expense ratios from 0.14% to 0.18%; Vanguard and iShares ETFs.
More control. Correct or cancel planned trades. Lock in specific ETFs based on your preferences.
Talk with a licensed advisor. Have a question? Call Monday through Friday and speak with a financial advisor on any topic.
Free portfolio analysis. Link all of your financial accounts and analyze your entire portfolio based on your selected risk score.
Long-term focus. Emphasis on retirement planning and investing.
Clean and direct. Focuses on a few specific offerings, making this a robo-advisor for more hands-on investors.
Householding. Management of multiple accounts towards one specific goal, such as retirement or a large purchase.
How Does FutureAdvisor Work?
FutureAdvisor offers a free portfolio assessment and automated portfolio management for a small yearly fee.
Customers also have access to licensed financial advisors for day-to-day questions regarding their portfolio.
Investors begin by depositing or transferring at least $5,000 into an account held by Fidelity or TD Ameritrade and managed by FA.
The account is subject to a 0.50% yearly fee of assets managed, plus any expense fees from held ETFs.
Asset Allocation Driven by an Investment Algorithm
The core of FA’s offering is portfolio management run with limited human involvement. This means that an algorithm dictates the composition of a portfolio.
But how does the algorithm know what to invest in and how to invest?
At a high level, FA builds a portfolio based on a customer’s investment goals, investment horizon, risk tolerance, and available capital.
The algorithm then purchases a selection of assets and rebalances those assets as needed.
Investment goals include:
- Major purchase
- General Investing
Laser-focused on ETF's
As a robo-advisor, FA uses ETFs as a low-cost way to maintain an optimal portfolio balance. An optimal portfolio is made of a combination of asset classes, from US equity to bonds and everything in-between.
Below is a list of the available asset classes and a selection of ETFs that FA may purchase and hold in your portfolio.
US Equity Large Cap
IVV, VTI, SCHB
US Equity Value
IVE, IWD, VTV
US Equity Small Cap
IJR, VB, SCHA
International Equity Total
IEFA, VEA, SCHF
International Equity Value
SCZ, VSS, SCHC
Emerging Markets Equity
IEMG, SCHE, VWO
IYR, VNQ, SCHH
IFGL, VNQI, RWX
Broad US Bonds
AGG, BND, SCHZ
Corporate US Bonds
International Emerging Debt
High Yield Bonds
A Major Component: Tax-loss Harvesting
This is an important component of many robo-advisors. It’s no different with FA.
Tax-loss harvesting works by selling a loss and buying a similar ETF in the same asset class. The sale creates a taxable event that is harvested at the end of the year.
FA monitors your account, looking for positions with at least $500 or 1.5% that are harvestable. At the end of the year, the losses will add up to tax savings for each account.
Extra Costs and Fees
In addition to the annual fee and expense fees from the ETFs, FA customers may incur the following extra costs:
- Trading commissions during the initial portfolio rebalance
- Account transfer fees from certain brokerages, up to a maximum of $100
How to Get Started
There will be six steps to follow when getting started with FA.
Analyze Your Portfolio
Deposit or move funds to a Fidelity or TD Ameritrade held account
Initial portfolio rebalancing begins after funds are confirmed
When you first register, you’ll be asked about basic information including annual income. You’ll then be asked a core question that will help FA decide how to invest for you:
What are you saving for?
Here are the three options to choose from, which will tell the algorithm how to structure the portfolio.
- Major purchase
- General investing
Here, retirement is selected.
Next is a prompt for retirement age, initial investment, and risk tolerance. Now the risk tolerance is the most interesting part, and arguably the most important.
The choice here will greatly affect how a portfolio is structured. Here are the options given:
- Conservative - “You are willing to accept lower returns because you strongly prefer lower investment risk.”
- Moderately Conservative - “You prefer some growth in your portfolio but are very mindful of the risks of investing.”
- Moderate - “You prefer a balance of lower risk, steady returns, and higher risk growth investments.”
- Moderately Aggressive - “You prefer a higher portfolio growth rate but are concerned about excessive investment risk.”
- Aggressive - “You are willing to accept a high level of investment risk in pursuit of higher returns.”
In addition, FA offers a sixth option: “I’m not sure”. This prompts a questionnaire with questions such as:
- “Generally, I prefer investments that don't dramatically rise and fall in value even if they come with potentially lower returns.”
- “If the market sees a big downward swing how would you react?”
- “Where would you be most comfortable placing yourself on the risk tolerance scale from 1 to 5?”
Based on the answers to the questions a risk score is given. As an example, this portfolio will have a risk score of moderately conservative, including a breakdown of the investment strategy.
FA also offers to analyze the current investment portfolio. Just link the required accounts. You can link most common brokerages, and can manually add accounts if you can’t link them.
After linking, the FA system analyzes the portfolio against the previously determined risk tolerance.
FA then gives an overview of the health of the portfolio, focusing on four factors:
- Asset Allocation
- Available cash
- Fund fees
The portfolio is measured on these four aspects against what the FA system determines is optimal. A rough scorecard is provided for each aspect and a bottom-line review appears.
This next part is the FA pitch: Pay an annual fee to have FA manage the portfolio, which includes personalization, automatic rebalancing, access to low-cost funds, and finally, financial advisors who are available to answer day-to-day questions throughout the week.
FutureAdvisor is a top-ten robo-advisor with a specific set of offerings. Modern investors who want bare-bones, do-it-yourself robo-advising, including accounts held with two credible institutions — TD Ameritrade and Fidelity — should take note.
Pros & Cons
- Top 10 robo-advisor by AUM
- Tax-loss harvesting available on paid accounts
- Serves as a fiduciary, meaning they simply manage accounts
- Consolidate financial accounts at two trusted institutions, Fidelity and TD Ameritrade
- Override investment decisions
- ETFs used almost exclusively
- Licensed advisors available to answer questions
- House holding available for grouping accounts
- More expensive than competing robo-advisors
- No mobile apps
- Light on features relative to competing robo-advisors
- Some additional fees from trading
- High $10,000 account minimum
- Requires consolidation of financial accounts at either Fidelity or TD Ameritrade
Should You Use FutureAdvisor?
FutureAdvisor is leading robo-advisor with a very specific use-case. Many investors will be turned off for three reasons:
- Higher-than-average fees
- Required accounts at either Fidelity or TD Ameritrade
- Lack of advanced features like direct indexing
However, for certain investors, FA is a good decision. For those reluctant to invest funds directly with companies like Wealthfront, FA offers an alternative as they simply manage accounts held at Fidelity or TD Ameritrade.
In addition, FA allows more control over portfolio transactions. Don’t like a particular trade or want to lock in a specific ETF?
You can do that. Last, FA offers a bare-bones interface without the extra frills of many of its competitors.
Overall, FA is a top 10 robo-advisor that fills a specific niche in the market.
Courtney Bower writes about investing, behavior economics, real estate, and psychology. He served as a US Peace Corps volunteer in Ukraine. He is originally from the Midwest.