FutureAdvisor operates a ‘freemium’ business model, where it offers you free portfolio recommendations and account, however if you wish for FutureAdvisor to manage your accounts directly, then you will have to pay for its premium service.
FutureAdvisor does not hold brokerage accounts directly but does so through Fidelity and TD Ameritrade.
FutureAdvisor’ investment methodology is based on Modern Portfolio Theory. The premise behind this theory is: you can’t beat the market so you should instead create a long term broadly diversified portfolio that maximizes return for the lowest level of risk.
About FutureAdvisor Inc.
FutureAdvisor is a robo-advisor based out of San Francisco, California.
Founded In: 2010 by
Founders: two former Microsoft employees
Assets Under Management: as of its latest SEC filing has approximately $969m
While it was originally owned by a mix of venture capital firms, it was acquired by BlackRock Inc., the world’s largest asset manager, in 2015.
Based on the time period from July 2013 to Dec 2016 (no backtesting), FutureAdvisor’s clients, split by age group from 30s to 60s, have obtained cumulative returns ranging from 17.3% to 27.0%. FutureAdvisor does also show backtested performance from the 2005 period on their site.
Figure 1: Return for FutureAdvisor's 30s age group clients
FutureAdvisor invests in low-cost Exchange Traded Funds (“ETF”), similar to most other robo-advisors. Currently, it invests in stocks, fixed income, and real estate. FutureAdvisor has not publicly disclosed the exact list of ETFs it uses to represent each asset class; however here are some of the ETFs that it has publicly disclosed.
To begin, you will first have to create an account with a simple password and email address. From there, you will receive a welcome email from FutureAdvisor and followed by a risk tolerance questionnaire. Questions include your age, annual income, marital status, number of children, planned retirement age, and personal risk tolerance level. After filling out the questionnaire, you will be able to link your investment accounts to the FutureAdvisor platform, where it will rank your account holdings based on their 9 ‘best practices’. You will also be given the option to open and directly fund an account instead.
Figure 2: Sample best practices comparison
You can open the following directly-managed accounts at FutureAdvisor: Traditional, Roth, Rollover, and SEP IRAs, Coverdell, 529, UTMA, as well as individual and joint taxable accounts. If you have any 401(k) accounts on the Fidelity platform enabled with BrokerageLink, FutureAdvisor can manage those as well.
Minimum Account Balances
For FutureAdvisor’s direct management premium services, the account minimum is currently $10,000.
For its direct management accounts, FutureAdvisor charges a 0.50% annual management fee, billed on a quarterly basis. FutureAdvisor also advises that some trading commissions may be incurred (although over 90% of its ETFs charge no commissions) as well as embedded ETF expense ratios. All-in-all, FutureAdvisors estimate that total costs, including management fees, average 0.65% annually.
Main Account Features
- Free Recommendations
- Automated Portfolio Rebalancing
- Daily Tax-Harvesting
- Access to Financial Advisors
If you’re a DIY investor who doesn’t want to pay any management fees to FutureAdvisor, you can still take advantage of FutureAdvisor’s portfolio recommendations indefinitely and execute the trades yourself through your own respective brokerages.
Note: If you’re over the age 68, you are unfortunately ineligible to use FutureAdvisor’s premium services.
Automated Portfolio Rebalancing
FutureAdvisor’s algorithm looks for rebalancing opportunities in its directly managed accounts on a daily basis. The algorithm utilizes market-based rebalancing, instead of calendar-based rebalancing, meaning that your portfolio is rebalanced as needed. Inflows and outflows such as dividends, deposits, and withdrawals are used for ‘mini-rebalancing’ purposes while regular rebalancing is done based on portfolio drift; how much your portfolio’s current allocation differs from its target allocation. FutureAdvisor has stated that on average, your portfolio will be rebalanced 4 – 6 times a year. You also have the option to request to ‘lock in’ certain specific investments (your favorite stock, for example) by contacting FutureAdvisor directly.
Tax harvesting is a tax deferral strategy whereby realized losses on investments are used to offset realized gains or ordinary income. Depreciated assets are sold to obtain the realized loss while at the same time a correlated asset is purchased to maintain the overall portfolio risk and allocation levels. There are no minimum balances required to use this service; you can use it as long as you are a premium client. However, FutureAdvisor has stated that generally speaking, its daily tax-loss harvesting is useful for accounts with balances of $20,000 and above.
Access to Financial Advisors
If you think the robo-advisory industry can be a little too impersonal for your liking, then FutureAdvisor has added back in a human element; something that makes it stand out from the robo-advisory crowd. You will have access to FutureAdvisor’s financial advisory team via chat, email, or phone, Monday to Friday, from 1130 AM to 8 PM Eastern. We should specify that this does not equate to a dedicated financial advisor for each account although FutureAdvisor’s human advisory team does monitor all managed trades in addition to the company’s algorithm.
Who is FutureAdvisor Suitable For?
If you’re the sort of long-term investor who wants a ‘set it and forget it’ kind of portfolio, then FutureAdvisor may be for you. If you want to create a broadly diversified portfolio based on Modern Portfolio Theory but don’t feel like paying FutureAdvisor’s management fees, then you can make use of their free investment advice and recommendations. Also, since many robo-advisors are yet to offer 401(k) accounts, if you have 401(k) accounts on the Fidelity platform, you can also benefit from FutureAdvisor’s services.
P.S. If you’re looking to beat the market by investing in specific securities or through market timing; then FutureAdvisor, or any robo-advisor, is definitely NOT for you.