FutureAdvisor Review: An Interview With Bo Lu, CEO On The Digital Wealth Management Industry

FutureAdvisor ReviewI’m pleased to share an interview I did with Bo Lu, the CEO of FutureAdvisor. FutureAdvisor is an algorithmic money manager with sophisticated tools to help clients manage their money. Over 200,000 households use FutureAdvisor’s advice to help grow $30 billion.

I invited Bo over to play tennis at my club and chat about business in between games. I’m fascinated by the entrepreneur’s story and I hope you’ll find this interview insightful. Bo shares his thoughts about the future of the online wealth management business, immigrating to America, why he decided to leave his job at Microsoft, the Y Combinator experience, and more.

INTERVIEW WITH FUTUREADVISOR CEO, BO LU

Please tell me about your background. You mentioned your parents came to the States when they were 40. Did you have a difficult time assimilating into a new culture? I’m curious to hear your thoughts on why there are so many immigrant success stories.

Bo: I was seven when I came to the US from China. I only knew two words of English — lake and cake — and I usually got them mixed up. So yes, there were some speed bumps. But I had a really great English teacher in Morgantown, Virginia, who basically made me fluent within a year. Mrs Hutchison. I’m still grateful to her.

Immigrants can see with clearer eyes how enormous the opportunities in America are. A lot of them come from places where their choices are extremely limited, so they can almost feel the freedom with their fingertips. They can taste it. If you grow up in America and never see the alternatives, you might be blind to how much you can do here.

Why did you decide to work at Microsoft? Why do people stay at Microsoft when it seems like they have gone ex-growth?

Bo: I was recruited for an internship at Microsoft while I was completing my computer science degree at the University of Illinois Champaign-Urbana. There are great people working there. You have to remember that Microsoft is a huge company. Some parts may seem ex-growth, but some are very much in the growth mindset. When they released the Kinect in 2011, that was ground breaking. Google’s only catching up now with Project Tango. There’s a lot of innovation going on.

What gave you the courage to leave your job at Microsoft to start FutureAdvisor? Please share with us your experience at Y-Combinator.

Bo: The company was really born out of scratching our own itch so to speak. Our friends kept coming to us for financial advice and it seemed like there were no great options for young professionals like us. My co-founder Jon Xu and I both saw our projects slow down at Microsoft, so we suddenly had some time and energy to devote to our friends. Jon’s got a lot of talents, including being a great technical lead. So we set out to build this solution to help our friends take control of their finances. To do market research, we talked to our friends and countless strangers at coffee shops about what they expect from a product like this and whether they would pay for this service.

We’re great friends with Garry Tan, then the co-founder of Posterous who did Y Combinator and had nothing but great things to say about the experience. When we got in, Y Combinator exceeded our expectations. Because we built the first iteration of FutureAdvisor from scratch during YC, we got a lot of insightful feedback from the partners and our peers on a constant basis, allowing us to iterate very quickly. It also gave us a great platform to introduce our product to investors, customers and talented engineers we would later hire.

Did you make a financial plan or create financial goals before leaving Microsoft?

Bo: I’ve been investing and thinking about financial goals since I was a teenager. Most of what I earned at my first internship got invested in a number of tech funds. That was before the dot-com bust, and it taught me an important lesson about diversifying.

What is your definition of success in the startup world?

Bo: It depends on the stage of the startup. Very early stage startups are successful if they can identify a product people want, and gather a team to build it. A couple years in, startup success usually means very fast growth — like 30 percent month on month revenue increases — even if the business isn’t profitable yet. The next milestone is when the startup finds a way to acquire customers inexpensively and reaches a scale where it becomes profitable. At that point, it’s become a company that can be judged by normal financial metrics.

Bo Lu, FutureAdvisors

What percentage would you attribute success to hard work vs. luck?

Bo: Well, I’m a well educated male who was raised by loving parents and lives in America. That support and those opportunities make me feel very lucky. My parents also taught me the value of hard work, and like most founders, I do work very hard. At a certain point, work lays the groundwork for luck. A friend of mine says: “The harder I work, the luckier I get.” For me, that means that all of us create an ecosystem of friends and partners around us. We all build networks of support, we all have reputations, and we all try to deliver on our promises. The better we do that, the better the world responds.

What are the two or three main reasons why some startups fail even though the market opportunity is huge?

Bo: Every successful startup does similar things to succeed, while every failed startup fails in its own way. Everyone thinks their market opportunity is huge, otherwise they wouldn’t be doing it. But they need to confirm that. They need to take what they made to the people who might use it and verify how much those people would pay. That’s the first step. Some people are too precious about their ideas to really test them. Tech risk and market risk are the two biggest reasons startups fail.

Secondly, founders need to be people who can build a team. That means being just hard-assed enough to make sure things get done, and just soft enough to attract a good team and keep them happy. That’s a fine line to walk and it’s easy to err on either side.

The best CEOs are listening all the time. They’re listening to customers to discover their problems and fix them. They’re listening to employees to make operations run smoother. They’re listening to experienced investors who may have confronted similar problems before.

Third, some startups are wildly innovative but don’t manage to convince the world that’s the case. Engineers need great marketers, great communicators, and lots of visibility. The worst way to fail is to never be noticed when you’ve built something great.

What do you look for when looking for investors?

Bo: We had our choice of great investors. But best thing I would recommend anyone do is talk to other founders they trust, who have worked with investors you’re considering, and learn about how they work. You want people who will share your values, trust you to do your work, and stick with you through thick and thin.

You mentioned the FutureAdvisor algorithm is on its 8th iteration. Please explain what that means exactly.

Bo: FutureAdvisor’s recommendation engine has gotten smarter with every iteration. When we started this, we made recommendations at the asset level only. For example, very early on we would tell you that you needed to increase your foreign developed equities from 5% to 10% or that you are overpaying in fees by $250 per year on a fund.

Over time, we’ve developed more precise recommendations down to the commission-free fund that you should actually buy to move your foreign developed equities percentage and save you on fees. We would take into account your employer sponsored 401(k) plan as well in our analysis of your portfolio. A much smarter algorithm now allows us to deliver more precise portfolio results. Our premium service now takes into account tax lots to minimize tax impact of rebalancing and we can automatically harvest tax losses to further minimize your tax exposure.

Where do you see the future of the financial tech advisory industry in five years? Is the market big enough for everybody to win?

Bo: In the long run, no market is big enough for everyone to win. But for the moment, financial tech is a pretty green field. There’s so much to be done. The choke point is the talent and drive to execute on a vision. Financial services have been getting more automated for decades, ever since the back-office crisis of 1970. People and paper simply are not built to handle the volume and speed of financial data. The evolution away from people and paper will continue. In five years, a handful of financial tech firms will be household names. We plan to be one of them.

What is FutureAdvisor’s competitive advantage over other algo advisors such as Betterment and Wealthfront.

Bo: From our perspective, the major online investment managers have different strengths: Betterment is great if you’re focused on short-term savings rather than retirement. Wealthfront is great if you’re coming straight from cash, but they can’t see assets that aren’t held by them directly (i.e. prior investments across many accounts). FutureAdvisor looks at all your assets, including your 401k. We rebalance your portfolio, spreading your risk exposure across domestic and foreign equities, bonds and REITs. We balance the rest of your assets around your 401(k).

FutureAdvisor also conduct daily tax-loss harvesting — which uses any stock-market losses to offset the taxes you owe. Our typical account size is about $100,000, and we usually save people around $1000 in fees and taxes per year.

How do you think about pricing? I believe FutureAdvisor is at 50 bps, which is higher than your competitors.

Bo: Our prices are half the price of traditional wealth managers, and lower than some of our competitors. And we aim to do a lot more for investors than our competitors.

At 50 bps, FutureAdvisor can generate $5 million in revenue managing $1 billion dollars. How much under management do you need to run in order to generate an operating profit? Does being profitable matter in the short-term since there is so much venture capital money chasing deals? Do you have a target AUM over the next 1, 3, and 5 years?

Bo: We run a very lean team. Since we don’t need to pay for a large sales staff, our path to profitability is fairly short. We expect to revenue neutral at $1B in AUM. That said, we expect to raise additional funding to enable us to grow beyond that point.

Sam: Do you believe the industry is a little too complacent right now given stock markets are at record highs? How do you think the industry will change if there is a prolonged multi-year downturn?

Bo: I don’t see any complacency. Most of us experienced the dot-com crash and the great recession, and we have vivid memories of what a downturn is like. Everyone (here and industry wide) is working to make sure we can handle that situation well. Prolonged multiyear downturns always have an effect on finance. Usually you see consolidation. Firms pool their resources or die. Fewer challengers enter the market.

Sam: What is your advice for users who are skeptical of using an algorithmic advisor?

Bo: First of all, I’d say: Give us a try. You can set up a free account in a few minutes, and we’ll give you actionable advice for no charge. See what you think. Secondly, I’d say that traditional advisors are using algorithms, too. It’s just that people feel the handshake and don’t see the math. All financial advisors have models they apply to their clients.

HERE’S A SAMPLE OF HOW FUTUREADVISOR WORKS

1) Once you register, you’ll be promoted to share a little about yourself. The first chart helps FutureAdvisor ascertain your current risk-profile and goals to come up with an ideal target portfolio recommendation.

FutureAdvisor Dashboard

2) The second chart shows you your existing portfolio grades based on Performance, Diversification, Fee Efficiency, and Tax Efficiency. The goal is to get A’s in all categories.

FutureAdvisor Dashboard

3) The third chart gives you specific advice on how to improve your portfolio. I love this feature because too many times financial advice is very general in nature. I like advice that provides concrete steps.

FutureAdvisor Recommendations

4) The final chart shows your now A-rated portfolio, all thanks to FutureAdvisor’s algorithms. You can do all the changes yourself for free, or you can have FutureAdvisor manage your portfolio for you for 0.5% of assets a year. They’ll conduct tax loss harvesting to optimize your portfolio as well and there will be no more trading fees once you are a client.

DIGITAL WEALTH MANAGEMENT SOLUTION

FutureAdvisor looks like a terrific solution for those who are tech savvy, but don’t have hundreds of thousands of dollars to invest at the moment. You can start with as little as $10,000 and go from there, or use their free financial tools.

Good savings habits builds wealth. But it’s the proper investment of those savings that creates great wealth over time. FutureAdvisor can help you build financial freedom sooner, rather than later. Once you link your accounts, you’ll get a free Personalized Investing Plan in 2 minutes. They’ll tell you exactly how to improve it.

Regards,

Sam

Updated: 12/1/2014

How Much Do I Have To Make As An Entrepreneur To Replace My Day Job Income?

Entrepreneur Cash OnlyEntrepreneurship is great due to the high correlation between effort and success. If you want autonomy and believe you have what it takes to create income out of thin air, go for it! There’s nobody to blame for your failures, just like there’s nobody to reward but you for your victories.

Anybody who incessantly complains about their job should just give entrepreneurship a go – they will probably never complain again. A day job is a walk in the park compared to entrepreneurship because of the necessity to wear many different hats e.g. accountant, operations, marketing, sales, producer.

What I’d like to do in this post is provide a rough estimate of how much you have to make as an entrepreneur in order to make equivalent money as a worker bee. Hopefully this post will give you a better idea before taking a leap of faith. After all, you don’t want to quit your job and die alone do you? There’s no honey when you got no money.

How To Deal With A Micromanager Without Killing Yourself First

Your Micro Manager Donkey There’s probably nothing more annoying for an experienced person than to be micromanaged. I’m sure someone who is new to work finds being micromanaged just as annoying, but at least the boss has a good excuse. The novice could really mess things up without proper supervision.

Out of roughly 100 people I spoke to who were interested in leaving their jobs or had already left their jobs when conducting research for my book, roughly 70% of them said the main reason why they wanted to leave or did leave their jobs was because of a difficult boss. The boss was either unfair, unpleasant, uninspiring, or a micromanager.

When a boss micromanages an employee they effectively do three things:

1) Undermines

2) Demotivates

3) Creates self-doubt

In other words, micromanagers are horrendous bosses who will likely lose all of their employees over time.

One reader wrote in,

“Sam, I’m dying here! My firm recently hired this hotshot 30-year old MBA graduate who thinks he knows everything. He used to work in recruiting before getting his degree and this is his first job working for a tech firm. I’m 34 years old and have been working here for five years. Recently, he’s been on my ass about checking all my work, telling me how to do my work, and asking me every time I leave my desk for more than 30 minutes. I can’t even take a dump in peace out of fear he’ll start questioning my whereabouts! I’ve got way more experience than him, yet he gives me no respect. What do you recommend I do?!”

Meet him in the garage after work and deal with the situation like a man by kicking his ass! Was my initial thought. Anybody who shows no respect for their elders should be taught a lesson. But of course, we’re not living during the time of honor. We’re living in the time of “what have you done for me lately”.

I truly empathize with the reader because losing autonomy was one of the main reasons why I left my job. When you’ve got plenty of other means to make a living, working for a micromanager is NOT WORTH IT. But for those of you who have no way out yet, this post will discuss strategies on how to deal with micromanagers so you no longer have to feel miserable coming into work.

Should I Continue Working As A Contractor Or Go Full-time?

Relaxing In HawaiiIt’s been over two months since I started consulting at a financial tech startup and I’ve now got to make a decision to lobby for a permanent spot, stay on as a consultant if they’ll have me, or return to the world of fluffy rabbits and afternoon siestas in the park.

I have learned a TON about marketing and analytics so far, and I plan to learn a ton more for the remaining time left. It really never occurred to me to promote anything with marketing dollars since Financial Samurai has been organically grown since the beginning.

But if you can spend $1 dollar on marketing and get $1.01 in return, you should continue spending until your marginal revenue meets your marginal cost. Figuring out how to maximize one’s marketing dollars is the fun part.

The only thing I have to sell on my site is my book. Based on what I’ve learned, I plan to do some promotional tests and see how things go. The book’s monthly revenue is a tiny portion of my total monthly revenue even though it’s the only thing I sell here. Pretty neat huh? If I focus, perhaps I can grow my book’s revenue to 10-20% of total revenue. We shall see.

I think this post will be insightful for anybody who has ever had to make a decision between money, time, experience, freedom, joy, and responsibility. Let me first share five positives for continuing to work either as a contractor or as a full-time employee. I’ll then share the main negative and wrap the post up with some final thoughts. 

Reflecting On Two Years Of Freedom From Work

Why work when you can SCUBA?March 2014 officially marks my two year anniversary since I last held a full-time job. It’s been an amazing two years, filled with uncertainty and excitement as I worked to balance play with trying to feel useful.

To keep some discipline, I created a “production schedule” that officially began at 7:30am and ended at 11:30am. Sometimes I’d cheat by calling it quits before 10am because there was nothing left to do. Other times I’d keep going because I’d get hooked on what was happening in the stock market until it closed at 1pm PST. By spending three to four hours a day trying to produce something – writing in my case – I would never feel guilty spending the rest of the day doing whatever I wanted.

“Feeling useful” is probably the single most important attribute I’ve needed to experience during this time away. I’ve spoken to other people who no longer have to work and everyone agreed they need something meaningful to do in order to feel fulfilled. I’m thankful this site provides an easy way to add some value to society, no matter how small it may be. If you’re an early retiree who is bored and would like to share some insights, I’d be happy to publish your post here.

This post will share with you some thoughts after two years of being away from the days of always wanting to get paid and promoted faster. I’ve written a similar post about what early retirement feels like, but that post was written immediately after emancipation – like when Andy Dufresne from Shawshank Redemption finally broke free.