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

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. tom says

    I don’t know how to ask this without it sounding negative, and I like this idea, this service and this company, so I’ll just ask…

    A .5% fee is very low, but there are companies that offer lower fees for the same type of service, some as low as .25%. Maybe not as online accessible, but still the same service. So when he says he aims to do a lot more, what does that mean?

    • says

      @tom – I work with FutureAdvisor. You’re right, there are other firms that charge less. But they also do something quite different. People who invest through Wealthfront or Betterment do so through Wealthfront and Betterment accounts. You bring your assets to them — they don’t go to your assets. That’s a process that involves a fair amount of commitment and paperwork.

      FutureAdvisor rebalances your assets within your Fidelity or TD accounts. We come to you. You don’t have to choose to leave Fidelity to work with us.

      When we rebalance your assets, we take your 401k, IRAs and other investments into account. So we’re a holistic, big-picture financial advisor, as opposed to a target-date fund.

      Finally, while many online financial advisors offer tax-loss harvesting, ours is more comprehensive. Other companies will harvest tax losses from the moment you roll your assets over into their system — they handle future losses. We will harvest all losses you have incurred historically; i.e. if you bought something and it went down before you joined FutureAdvisor, that is still a loss we can harvest to offset your taxes.

      Over all, I’d say what we offer is more convenience, a bigger vision of your assets, and the ability to save more money on taxes. Our service more than pays for itself in savings.

      • KC Wong says

        Chris,

        Do your algorithms just provide asset allocation type advice, or do they customize it based upon your goals (retirement age of husband and wife, level of risk, etc.) and also take into account how you would best withdraw funds when you retire, taking into account social security, and a pension? Thanks.

  2. Zeynep says

    What a small world! I know Garry Tan and Jon Xu from my days at Microsoft, very very smart guys :) Good to read they are doing so well. Great interview with Bo, I have been using Personal Capital but will try FutureAdvisor as well.

  3. Austin says

    A girl at the office wanted to chat about investing. I told her I was a little concerned about the markets. Later she sent me an article with Jim Cramer regurgitating a Jamie Dimon letter saying “now is the time to buy the market, don’t be afraid”. Her subject line was “Seeee, I told you”. I didn’t know whether I should laugh or cry.

    I’ve never been convinced that I could go all-in on a service like this but I think it can be really great for someone who is otherwise simply watching Jim Cramer pitch IBM and then hopping on etrade.

  4. says

    Very interesting idea! I think it is generational though. Old rich people like the hand holding of a wealth manager and young people are very online oriented. Right now there are many more “old” rich people that young ones. Over time, this could be the direction of the industry though. It relies less on individuals and more on the process.

  5. says

    I think he’s got a really promising product, and he seems like he’s got great perspective on what it takes to be a successful start up. I really hope they succeed, the cost of professional financial advise is outrageous. Technology like this could work to change that across the board.

  6. AC says

    Overall, this is a very cool idea and could attract those who have good financial knowledge and know what they are doing with their money. At the same time, many middle class folks have little knowledge about things Bo was talking about while some others have complex financial situation (e.g. estate planning). I am wondering if the tool would actually tell people that they might need life insurance to mitigate risks or tell clients to get annuity. Also, CFP has to deal with some non-financial issues the clients might have as now we live in a fairly complicated life, a lot of money issues are actually 100% people related. It is not something algorithms could help to solve.

  7. Ravi says

    I’m a little unique, because I plan to manage my own investments for the foreseeable future. However, I do think this or Personal Capital are fantastic products for people who don’t have the knowledge to do so themselves. I try and put myself in my sister’s shoes, who is a Doctor, but knows little about personal finance or investments. I think services like these are exactly what people need and the opportunity is huge for people who don’t want to pay 1% to a human advisor.

    I don’t see myself handing over the reigns, but that’s mostly because I don’t have the assets necessary to qualify to hire someone who is more capable than myself. Eventually, I think I will start to value my personal time enough to hand over the basics to someone else… but technology may narrow that gap considerably.

    I think for high net worth individuals, I don’t believe a non-human-included service could completely replace actual advisors, but that’s just because their needs are a little more complex than just choosing investments. It’s not terribly difficult to find out the “ideal” exposures based on age and then choose Vanguard funds to get the exposure. You could even use Future Advisor’s free service to do that.

    I opened an account and reviewed the analysis, but it seems to be of limited use since it just tells me to sell all my individual holdings. I have heavy exposure to alternatives, but that’s only because of my personal preferences and understanding. I’ll keep tabs on this though. I like what I see so far.

  8. says

    Very interesting article and approach to helping people manage their assets.

    However, I am very curious to see how these types of firms become successful. For people that need significant handholding and are interested in a non personal approach to financial advise for their assets typically have very few of them to begin with. Additionally, these fees (regardless of how low they are), are on top of transaction fees and other fees associated with your funds.

    On the positive side, I do agree that there is a market for this type of service, just not sure how profitable it is. I imagine the goals of the founders and angel investors are more interested in getting an established financial firm to purchase them for the technology (IP) than they are interested in building AUM.

  9. says

    Hey Sam,

    Interesting to read that people are producing algos. I’ve got a friend who’s been doing the same thing for a few years, with the project nearing completion within a couple of months.

    Personally, I wouldn’t dare to use an algorithmic advisor. But then again, I wouldn’t want a financial advisor to do it either. I dislike not being in control of making decisions.

  10. says

    Hey Sam,

    Great interview and awesome concept for Bo, love the segments where you are interviewing people and it is quite inspirational..

    One thing I would love to hear is the tough or difficult components, that is really where I am interested in finding out more about. Plus how your interviewees overcame these.

    Cheers

  11. pkeller3 says

    Interesting interview and interesting product.

    As a fellow UIUC alum and current resident, I was distracted by your spelling of Champaign :).

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