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You can sign up for an account and receive a basic portfolio analysis for free. The paid services (also called premium services) involve direct management of portfolios. The firm uses automated tools to analyze your current portfolio(s) compared to model portfolio(s) for your time horizon, risk preferences, and age. Then FutureAdvisor implements sell and buy recommendations to align your portfolio with the models.
The firm creates ETF-based portfolios and offers portfolio re-balancing and tax-loss harvesting services, similar to that of Betterment and Wealthfront. To get going, you link your investment holdings in your IRAs, 401(k) plan, and taxable accounts to the firm’s interface, and then FutureAdvisor creates a diversification plan across your various accounts.
If you choose its paid or premium services, the firm executes trades on your behalf but you keep your investment accounts at a brokerage firm that acts as a custodian (either TD Ameritrade or Fidelity). Otherwise, you can use the basic, free services to analyze your portfolio.
The firm invests according to its interpretation of the Modern Portfolio Theory (MPT). (In my previous research and article published here, the company referenced its use of the Fama-French Three Factor Model. However, this model is no longer mentioned.)
MPT proposes that there is an efficient frontier in which investors can receive the maximum return at a given level of risk, which FutureAdvisor determines based on individual risk tolerance, time horizon (years until retirement), and age. Based on this information, the firm proposes a recommended asset allocation, specifically a stock-bond mix.
The Fama-French Three Factor Model indicates that greater inclusion of small-cap stocks and value stocks tend to deliver better returns over time than a more traditional asset allocation involving the entire stock market. Based on my readings, the three risk factors that you take with this model are:
- market risk (which you assume by investing in stocks)
- risk or greater volatility associated with smaller companies (as opposed to large, well-capitalized stocks)
- risk associated with investing in value stocks (though value indicates a lower valuation and perhaps a better deal in terms of stock prices, value can also represent an out-of-favor stock that is valued low for valid reasons)
Further, the firm holds to the idea that you should invest in low-cost ETFs because they are tax-efficient and have minimal fees.
Fees and Minimums
There are free and premium versions of the company’s services.
Do-it-yourself aka self-directed investors who seek basic guidance can use the portfolio analysis tools to identify potential areas of weakness, compared to a model portfolio created by the advisor. In the past, these recommendations were more detailed; today, they are focused on basics of portfolio risk, asset allocation, uninvested cash, and fund fees.
The premium version of the portfolio management service costs 0.50% of assets under management (AUM) plus the cost of trades made on your behalf. Note that if you allow FutureAdvisor to manage your money, you must have an account with TD Ameritrade or Fidelity; the firm facilitates a move to these brokers if your accounts are not already there. The possible advantage of using the premium service is that trades are executed on your behalf, including trades made for tax-loss harvesting and re-balancing purposes; therefore, you are not troubled with many day-to-day decisions.
There are no minimums to use the free service. You’ll need $5,000 in investable assets to open a premium account.
Getting Started with FutureAdvisor
Start by signing up for a free account with FutureAdvisor.
Next, you’ll need to gather and enter information about your current holdings, including whether an account is taxable or tax-advantaged, such as an IRA, Roth IRA, etc. There are two main ways to enter information about your current portfolio: 1) link your accounts to the FutureAdvisor site (for example, enter your username and password with Vanguard, and your information will automatically populate your portfolio balances) and 2) manually enter information about your holdings.
Then, you’ll respond to prompts about your plans for retirement (specifically, enter your current age and the age you plan to retire) and whether you have a conservative, moderate, or aggressive risk tolerance. Note that the weighting of stocks to bonds increases as your tolerance for risk increases.
Based on your inputs, FutureAdvisor will provide a Target Portfolio and formulate an action plan that allows you to achieve this targeted asset allocation. You’ll also receive a score of your current portfolio in the areas of portfolio risk, asset allocation, uninvested cash, and fund fees (formerly, these categories were performance, diversification, fee efficiency, and tax efficiency).
Viewing the Target Portfolio
You can view the target portfolio along with key statistics that include inflation-adjusted projections of annual performance under average and poor market conditions.
When I first tested these services several years ago, the asset allocation of my targeted portfolio (aggressive) contained the following:
- Domestic Total Market 13%
- Domestic Small Cap 7%
- Domestic Value 13%
- Foreign Total Market 8%
- Foreign Small Cap 4%
- Foreign Value 8%
- Emerging Markets 17%
- Domestic REITs (Real Estate Investment Trusts) 6%
- International Real Estate 6%
- International Bonds 4%
- TIPS (Treasury Inflation-Protected Securities) 7%
- Bonds 4%
Note that Domestic Value is weighted the same as Domestic Total Market and the Foreign Value is similar to Foreign Total Market; Small Caps, both Domestic and Foreign, are featured prominently; and there is a relatively high weighting of Emerging Markets.
Aligned with FutureAdvisor’s (former) investment philosophy, this weighting tilts toward small caps and value stocks. The weighting is heavier towards equities (stock funds) because of my aggressive risk tolerance and the firm’s bias toward stocks, which have historically outperformed bonds in the long term.
Reviewing and Implementing Recommendations
Currently, FutureAdvisor gives you a thumbs up or a thumbs down to determine your portfolio’s standing in the areas of portfolio risk, asset allocation, uninvested cash (which it considers bad), and fund fees. Previously, it scored portfolios in these areas:
FutureAdvisor provided a letter grade (A to F) and a performance analysis, which consists of a backtest and forecast as well as performance over the last one and three months. The forecast is based on historical data and future performance may or may not replicate past behavior.
Backtesting is a tool that others may find useful. There are a couple of concerns I should mention in regard to backtesting. For starters, the portfolio you have right now may not resemble the one you had several years ago; that is, you may have bought and sold stocks intelligently but your current holdings may not have performed well during a time in which you did not own those particular stocks, possibly making the backtesting irrelevant.
Also, the target portfolio is designed based on past performance, so generally such a portfolio will outperform ones that didn’t incorporate historical information to create.
Still, it was interesting to see how my portfolio moved similarly to the target portfolio but did not deliver as high returns; however, my holdings outperformed the targeted one over the past one and three months. My 401(k) was not included in the analysis.
The diversification analysis offered a broad view in terms of stocks/bonds mix as well as detailed information relating to diversification in global funds, REITs, inflation-protected bonds, small cap and value funds, etc.
Your holdings were rated on their fee efficiency (similar to the current fund fees rating now). Details on what makes a fund efficient are not detailed but presumably your portfolio can be fee-efficient by purchasing funds with low operating and marketing expenses, no sales loads, and no transaction fees. My portfolio was so fee efficient that I was told that I had the flexibility to spend more for diversification.
Individual holdings are analyzed to determine tax efficiency. For example, you might want to hold a mutual fund with high portfolio turnover in a tax-advantaged account to avoid having to pay capital gains when holdings are sold. To help clients better understand recommendations for moving holdings among accounts, FutureAdvisor provides a link to this article on the principles of tax-efficient fund placement.
FutureAdvisor offers its managed portfolio services for .50% of AUM. These services include transitioning your current portfolio to a tax-efficient one and trading to build this new portfolio in a tax-aware way.
If you are getting started in investing and have all of your money inside of IRAs, then tax-efficient and tax-aware methods are generally not going to add value. The firm can simply sell certain holdings and reinvest in its recommended ones.
However, if you have investments in taxable accounts only or a mixture of taxable and tax-advantaged accounts, then the firm will employ a strategy that considers your tax situation. According to its FAQs – Taxes, FutureAdvisor indicates that trades on short-term capital investments will be made that trigger up to $200 or 5% of the portfolio’s value in taxes, and long-term holdings will be carefully sold, drawing on a variety of factors. You can also manually control trades by locking certain investments to prevent sales (click on the unlocked icon next to a holding to “lock” the investment).
Based on my use of the firm’s free services, here is what I have discovered about FutureAdvisor:
There were a few good and useful features associated with a FutureAdvisor account.
Free services and relatively low fees. You can sign up and get the portfolio analysis at no charge. The grades and details about those grades may help you pinpoint potential problems and give you ideas on how to deal with those problems. For example, you may not have realized that you have cash in an account that’s ready to invest.
If you decide to use premium services, the fee is relatively low (.50%) compared to traditional advisors (though high compared to some robo-advisors).
Portfolio Analysis. The model portfolio is useful if you are seeking to replicate the firm’s diversified portfolio. At a glance, you can identify segments in which to increase your exposure. For example, you may realize that you want to increase your holdings of international stocks or inflation-adjusted bonds.
Tax efficiency. The firm seeks to place tax-efficient investments inside taxable accounts and not-so-tax-efficient ones inside tax-sheltered accounts. In addition, the firm employs strategies to help control your tax bill.
NOT SO GOOD
There are a couple of areas in which FutureAdvisor falls short, compared to its promises of holistic portfolio analysis and tax-efficient recommendations.
Portfolio analysis excludes 401(k). The firm purports to analyze your entire portfolio (except what you intentionally exclude) but didn’t include the 401(k) balance I had added manually. This exclusion negated the purpose of getting a comprehensive view of my portfolio.
In my case, most of my international funds are held inside my husband’s 401(k). Instead of giving us credit for holding international funds in the portfolio, FutureAdvisor suggested that I invest in a Target Date fund. This recommendation not only would result in higher fees but could also counteract my portfolio diversification process.
Individual stocks are not recommended (ever). Optimistically, I expected that my stocks would be classified according to capitalization (large or small) and style (growth or value) and then included in the portfolio analysis, and trades recommended to bring the portfolio into alignment with the target. However, the recommendation that I received was simply to sell all stocks and invest in ETFs because FutureAdvisor doesn’t invest in individual stocks.
Inaccurate classification of IRA. Finally, one of my accounts was inaccurately classified as taxable in some sessions, leading to a misleading recommendation to purchase a more tax-efficient fund.
There are a few things you should know about FutureAdvisor to understand its potential role as part of an investment strategy.
Retirement planning focus. Initially, FutureAdvisor focused on retirement planning, but not necessarily wealth accumulation in general or investing for long-term goals involving education, extended travel, a vacation home, or downpayment on a primary residence. Since then, however, the firm has added categories for major purchases and general investing or wealth accumulation.
Trading fees are charged. You’ll incur trading fees but most funds FutureAdvisor buys are available commission-free.
Greater emphasis on small cap and value investing. I mentioned earlier that the portfolio’s emphasis on small cap and value stocks will likely lead to performance that is not closely aligned with the broader U.S. stock market, possibly under-performing in some years and outperforming in others. Formerly, the firm reported actual client performance (aggregated) on this page (the page no longer exists).
Investors who are interested in automated financial advisory services may consider FutureAdvisor for retirement portfolio management. Self-directed investors may want to investigate the firm’s portfolio analysis capabilities but should realize that the tools are useful but not perfect.