Investing can be fairly complicated, even when you try to keep things simple. Follow the standard advice, and you’ll probably do all right – stick with low cost index funds and ETFs, and you’ll not only own a slice of the market, you will control your expenses, which leaves more money in your pocket and helps your nest egg grow more quickly. This advice, by itself, isn’t hard to follow. But things quickly become more complicated as your portfolio grows.
How do you manage your investments when you have a Traditional or a Roth IRA with one firm, a 401k in another location, and some taxable investments in yet another brokerage account? It’s not uncommon for investors to have funds in half a dozen locations. This becomes cumbersome when balancing your portfolio and paying attention to which investments you should keep in which account (tax-efficiency can have a huge effect on your portfolio).
Thankfully, technology has come to the rescue. Enter FutureAdvisor, a company that offers a free Portfolio Analysis tool, as well as a managed investment advisory service. They are similar in some ways, to Personal Capital (though there is a market and a need for both of these companies). Let’s take a look at what FutureAdvisor offers, and why you should give their free portfolio analysis tool a spin.
FutureAdvisor Free Portfolio Analysis Tool Highlights
FutureAdvisor offers two levels of service:
- Free – Portfolio Analysis and Recommendations
- Premium – Direct Management of Investment Accounts (they make the trades on your behalf)
The backbone of FutureAdvisor’s service is their proprietary investment software that analyzes investment portfolios and makes recommendations based on Modern Portfolio Theory. You start by inputting basic information including your age, target retirement date, and your risk tolerance, and FutureAdvisor gives you a recommended asset allocation. Then you link your investment accounts to their secure servers (they utilize Yodlee, which uses bank level data encryption, so your data is safe). Once they aggregate your investments, they make recommendations based on your accounts.
Does your current portfolio management tool include your 401k plan? A unique feature is FutureAdvisor’s ability to build their portfolio recommendations around your 401k plan or other investments you may not be able to easily change. FutureAdvisor offers the ability to link 401k plans from over 100 different employers, and more are being added on a daily basis. Recommendations are then made to balance your portfolio around the investments in your 401k plan or other investments you can’t easily change.
Portfolio Recommendations: FutureAdvisor will recommend additions and subtractions to your portfolio to help you achieve your target. The recommendations are specific: they recommend which shares to sell, from which account, and how much. Then they recommend what to purchase to redeploy your funds. They tax tax-efficiency and tax-loss harvesting into account when making these recommendations.
If you are a Premium subscriber, then FutureAdvisor will either make recommendations for which funds to move in or out of your 401k plan, or they will use that as the basis of your portfolio and make trades in your other accounts to meet your target asset allocation. The Premium FutureAdvisor plan currently only works with investments held in TD Ameritrade or Fidelity Accounts. They have read access and ability to make trades on your behalf, but don’t have access to withdraw funds. You can make changes or withdrawals at any time. (they can still aggregate investment information from hundreds of firms; they can only manage funds at the two sites mentioned).
FutureAdvisor Investment Methodology
As mentioned, FutureAdvisor features a Portfolio Analysis tool to help you automatically manage your investments. Their methodology is based on the published works of recognized financial luminaries such as John Bogle, William Bernstein, David Swenson, and more. In a nutshell, their methodology boils down to:
- Using low cost index funds and ETFs.
- Diversifying your investment portfolio based on your age, risk tolerance, and investment timeline.
- Utilizing different market segments to balance your asset allocation
- Periodic portfolio rebalancing (usually 2-4 times per year, or when you have outsized gains or losses).
- Tax-loss harvesting. They actively monitor your account and will make trades when they can harvest at $1,000 in losses at current market prices.
Here is an example of an asset allocation recommended for me when I played with the tool. The inputs I used were my age (34), risk tolerance was aggressive, and I want to retire by age 55. You can change the assumptions and view how the portfolio recommendation changes with your inputs.
As stated, there are two service levels, the free Portfolio Analysis Tool, and the Premium account. Premium subscribers will pay 0.5% of their managed portfolio (billed quarterly at 0.125% per quarter). They only charge management fees for funds they can actively manage. So if you have a 401k they can monitor, but not manage, then they will not charge you for that.
How does this compare? To put this in perspective, the industry standard for investment services is right around 1%. This goes for many independent financial advisors, as well as many large investment firms. Another difference is FutureAdvisor won’t make any recommendations to put additional money in their pocket. You won’t find mutual funds with front or back loads, high expense ratios, or large commissions. There are some companies that offer somewhat less expensive pricing, but they offer different service levels and tools.
What FutureAdvisor Doesn’t Offer
Some financial tools, like Mint.com and Personal Capital are able to help you view your personal financial accounts, like your checking, savings, credit cards, and other accounts used for daily transactions. FutureAdvisor is designed to only work for investment accounts. I don’t look at this as a negative, as it gives FutureAdvisor a tighter focus, which should help them control expenses and add features more quickly.
One downside – no support for Trade King (as of Feb 21, 2014), which is the brokerage I use for individual stock trades. It’s not a huge portion of my portfolio, but I would like to see it with my other holdings. For the record, I can’t link it to my Personal Capital account either. However, I can manually add investments to my Personal Capital account, which makes it easier to see all my holdings in one place. Unless I missed it, I wasn’t able to find a way to manually add holdings to my FutureAdvisor account.
Finally, not all 401k plans are currently supported, but from what I understand, they are actively adding the companies they support. If your company isn’t supported, then be sure to contact them. They may be able to get it added in the near future.
How to Get Started with FutureAdvisor
Starting a new FutureAdvisor account is easy. Simply visit their website, enter your email and a password and you have an account. Then you need to add your 3 data points, including age, investment horizon, and risk tolerance. Then link your accounts. Once you do that their software runs in the background and makes recommendations based on your specific situation. You can also request to speak with a CFP for recommendations based on your needs. They can even give you pointers for investing your 401k plan, based on your investment options.
Who Should Use FutureAdvisor
In my opinion, almost any non-professional investor can benefit from FutureAdvisor’s Portfolio Analysis Tool. It will give you an overview of your portfolio, and some recommendations to help you meet your target allocation while keeping an eye on fees, tax efficiency, and your investment goals. All of this is available with their free plan.
Investors who use their Premium plan will actually have FutureAdvisor make the transactions on their behalf. The Premium plan is best for investors who are looking for an automated solution based on proven investment methodologies and low expenses. The minimum for the premium plan is $10,000, but you may be able to get in with less than that if you commit to a monthly contribution.