The future for a lot of investors is through online advice — automated applications that scan our portfolios and make recommendations to lower fees and optimize our holdings.

Launching today, FutureAdvisor will do just that, for free. Focused on long term, cost-conscious investors, the web app monitors holdings, bubbles up ways to save on fees, and advises on which securities to hold/which to sell.

Cofounder Bo Lu joins us to discuss the launch of his company and his firm. Previously at Microsoft, Lu encountered an opportunity to help millions of investors with sound, jargonless investment advice using low cost, index funds. Backed by a top VC and leading angel investors, FutureAdvisor is the culmination of that vision.

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About Bo Lu

futureadvisor ceoBo Lu is the cofounder of FutureAdvisor and was previously the program manager on the Windows Phone 7 project.

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Zack: Welcome to Tradestreaming Radio. I’m your host, Zack Miller. I help bubble up tools, tips and technologies to help you investors make better, smarter investment decisions. Today’s guest on the program is Bo Lu. He’s the co-founder of Future Advisor which launches today, Tuesday, March 20th.

It’s an app that provides people with personalized financial advice, sort of this automated professional grade services I was talking about in my book, “Tradestream Your Way to Profits”, and I’ve been talking a lot about it on this program. The app helps recommend ways to reduce fees, maximize tax efficiency and helps optimize investment selection. So, you basically can hook up your account to Future Advisor regardless of where your brokerage is, and then Future Advisor sucks it in, analyzes everything and spits out advice.

What’s awesome about Future Advisor, beyond just the ease of use and the focus on being a long-term investor, it’s also completely free. They do have two premium programs called the Gold Plan and a Platinum Plan, one which is $50, one which is about $200, that gives you both alerts and scheduled meetings with a financial advisor that Future Advisor has on staff. So, if you want that sort of human contact, they have that as well, but the core product is completely free. I’ve seen the inside and it works really nice, very sweet and it’s launching today.

So, thank you to Bo for being on the program. It’s great to learn about your product. Good luck in your new launch and good luck growing your company. It’s actually backed by Sequoia Capitol and a few other really top notch angel investors, so it’ll be interesting to see the traction that Future Advisor gets.

Again, this is Zack Miller. This is Tradestreaming Radio where we’re focused on helping you guys make better investment decisions with tools, tips and technologies. You can find the archives of this program on my website, You can also find the archives of this program on iTunes. Feel free to sign up and subscribe, either way. We have a free newsletter that goes out weekly on, so come sign up for that. You’ll be kept abreast of all the new tools out there that I’m helping to review. Again, I’m very appreciative of your time and your energy. Thanks for joining us on the show, and we’ll catch you again next week.

Bo: Sure, my name is Bo Lu, and I am Co-Founder and CEO of Future Advisor. My background is in Technology Management and Computer Science. Prior to Future Advisor, I was a Program Manager at Microsoft. I worked in the Windows home team. I also started investing when I was 16 with proceeds from my first summer job and I have been the expert among friends ever since.

Zack: I don’t know, that may be a title that you don’t want sometimes.

Bo: [laughs]

Zack: Let me ask you, what was the jump from, say, what you were working on in Microsoft into launching a full-blown financial application?

Bo: Well, the job is actually very natural because we’re solving a problem that we saw on our own day to day basis. So, at some magical age in the mid-
20’s, folks at young tech companies, like Microsoft, start to really have money for the first time and they’re faced with a multitude, as you know, of investment decisions about where to place their 401(K), how to open an IRA, what kind of IRA to open, what to put in it, and almost everyone felt inadequately educated to the task.

And so, because I had been investing since I was much younger, many friends came to me for help, and I first said, “Well, why don’t you just go find a financial advisor”, and they said, “Well, I tried, but all the good ones don’t want to talk to me because I don’t have any money yet.” That was the first epiphany where I realized that the good financial advisors really only worked with folks who already had money, and it was hard for young people to get quality advice.

Then when I sat down with friends to help them work through their portfolios, I saw that everyone was making the same few mistakes over and over again, whether it was having no international diversification, or having a stock bond asset allocation that was way off for their age and time horizon, or just paying lots in mutual fund fees in a way that was hidden that they didn’t really even know they were paying.

So, after seeing the same problem over and over again, we thought to ourselves, “Well, this bears a software solution, so I don’t have to keep repeating myself every time I do this.” That’s the genesis of why we decided to create a software online financial advisor that does this for you.

Zack: Well, it’s more than you just not having to replicate your time with all your friends, and I hope you have a lot of them, but it’s also the fact that you’re providing this service to people, regardless of how large an account they are, right?

Bo: Correct, and that’s one of the main things that we wanted to do, which was to make financial advice and high quality unbiased financial advice, from someone who’s not trying to peddle annuities or life insurance or term life on you, accessible to everyone and anytime they would want it. So, Future Advisor is accessible in your pajamas at 3:00 in the morning, whenever you want to be empowered with the knowledge and the advice to take control of your own financial future.

Zack: So just the title, Future Advisor, are we talking about specifically targeting retirement income or could you be saving for anything at this point?

Bo: Future Advisor is coming out of the gate targeted specifically at long-
term investing, and long-term investing, the major goal many people have is retirement income. Over time, our vision is that the product will be able to help you with all sorts of time horizons and all sorts of financial goals.

Zack: OK, great, so I see that you’re registered as an investment advisor. You’re not custodying assets, but you need to be registered like that to provide the overlay of advice?

Bo: Correct, the FTC requires registration and we are registered with FTC to give financial advice in the United States.

Zack: Great, so I come into Future Advisor, I sign up and I see here, I have it open in front of me, personal profile, I set up my income. Why do you need my income? Can you tell me, just take me through a few of these fields?

Bo: Yeah, sure. The questions that we ask on the front page and personal profile, are to build both the asset allocation model target for the client, and also to do the financial projections that you see later on in the application. So, part of having a great financial plan is understanding how much you need to be putting away, whether you’re on track for your age and when you started, and how much you’ll need in the end to reach your financial goal.

Future Advisor includes a pretty sophisticated Financial Wealth Projection tool that takes into account how much money you make right now, how much income you want in inflation adjusted terms during your retirement, how long your retirement is going to be in this case, and things like we even adjust for Social Security payments calculated off of your income. You know, therefore, Social Security is calculated off of a formula that includes your income in the latter years of your working life. That’s one of the reasons that we need income. So, that’s some of the reasons that we ask those questions at the beginning.

Zack: Great, so I fill out all that information, I submit it, and then what happens?

Bo: Great question, the application can be thought about in three key steps. In the first step, by filling in the personal profile, we can create the target asset allocation for your situation, and in step two, you’re asked to import holding data from your existing investments and we use the same back end aggregation technology at to securely and safely import detailed position data…

Zack: Is that Yodlee?

Bo: It is indeed, so via partnership with Yodlee, we have access to thousands of institutions, and then step three is that we then take the data and calculate, based on your existing holdings and existing accounts, the step by step personalized recommendation that it takes to get closer to your target allocation, keeping in mind trying to minimize unnecessary transactions, trying to save you money on mutual funds fees, make you more tax efficient along the way, and get you better diversified.

Zack: So, the output of all that is going to be some suggestions. Maybe, like you said, my stock allocation is too low for my age. Maybe, I lack that international, so you’re going to spit out some analysis and some recommendations. What type of recommendations, first of all, am I going to get there?

Bo: Great question, you’re totally right on some of the things that you just mentioned. For example, we do alert you if you don’t have the international aspect that you might need to have, given your situation. If you don’t have some emerging markets, for example, or if you’re over exposed to domestic equities, which is something we see a lot in our analytics. We also point out situations like you’re not participating in your employer’s 401(K) plan or…

Zack: Free money, yeah.

Bo: Exactly, free money. If you don’t have an IRA even though based on your marital status, which we asked earlier, and your income which we asked earlier, we calculate that you’re eligible to contribute to an IRA this year, but even the bigger questions like do you have the right kinds of accounts and are you contributing to them correctly, are covered, and then we also highlight any high fee funds that you currently own and some suggestions for funds that you might consider in order to save yourself some fees.

The interesting thing, of course, as you know better than anyone, is that people think, “Oh, you know, one percent contribution this year, what’s the big deal,” but if you actually do the math and calculate that compound for a young person over 30 years, that’s a humongous amount of money, so that’s some of the things we try to help clients with.

Zack: So, what keeps me coming back to the site then? Am I encouraged to come back every quarter? Once you give me those recommendations, I go and I make the changes in my local brokerage account, my on-line brokerage account, then what keeps me coming back to Future Advisor?

Bo: That’s a great question, a couple of key things. One is that for any situation where you have money to invest, you get a bonus, many companies, especially in technology, have an employee stock purchase plan, when you have money to invest, the best starting point to figure out where to invest it is to come back to Future Advisor and see how your portfolio may have shifted since the last time you came back and how you might be able to just gently rebalance with new money. As we all know, if you can rebalance with new money, it’s the most tax efficient way of rebalancing.

Also, even if you don’t have new money, rebalancing alerts help you know when the market has shifted enough that it’s now time to rebalance, and gives you specific options on how to rebalance. As we know, rebalancing not only keeps your target risk profile, but it can also help increase returns over the long run, given a single risk profile.

Zack: Awesome. Just looking through here, so how did you come up with sort of the alternative funds? Are you looking just at a similar, I guess, strategy that the fund manages, just on a lower management fee?

Bo: Great question. One thing that I probably should have mentioned earlier is that Future Advisor is very strongly in the camp of index investing and
[inaudible 11:58] investing. We’ve looked at all the research, and it’s pretty clear that overall, human beings are not good at picking stocks…

Zack: No, we’re not.

Bo: …and more importantly, paying other human beings at picking stocks is totally a loser’s game. And so, that kind of ethos pervades the entire product, but specifically with our choice of funds, we look at the broadest index funds for those asset classes that we can find. Generally, we look for the lowest fee or one of the lowest fee funds we can find. We never put in a fund that has either a front end load or a back end load or a
[inaudible 12:37] fee or redemption fee or anything like that. Also, we look at tracking error.

We also look at, for example, commission free status in your brokerage because we know that with some of the biggest brokerages, some good funds are commission free. And so, we try to use those whenever possible, but we take that with a grain of salt because we all know where the money is going, and sometimes those commission free funds are hard to pass up the opportunity, so we use commission free funds as appropriate.

Zack: I just want to make sure that I have that clear. So, if I own an actively managed, say, large cap U.S. fund, is the top recommendation that Future Advisor is going to spit out, the passive version of that fund?

Bo: Yes.

Zack: That index fund, OK, and is that clear to people? I guess if people want to understand more about what’s going on, is it clear as I go through this sort of glide path, that that’s sort of the mantra, the ethos that you guys are sort of living by?

Bo: Absolutely, it’s clear on some of the outside pages of the product before you sign in. Also in each fund that we recommend, you’ll notice a little question mark icon and a “Why this Fund,” and we talk about specifically, why that fund. What index was tracked, what assets tracked, it helps you get exposure to that kind of thing.

Zack: It’s interesting because there’s like this whole sort of outgrowth of new firms that aren’t taking custody over assets, but are providing really sort of impactful periodic information and just off hand, I can think of a few. What sort of sets you guys apart from some of them? That’s sort of an unfair question, but the firms focusing on addressing this issue, whether it’s a GemStep or whatever SigFig has that they’re working on. How would you say you sort of differentiate yourself in Future Advisor?

Bo: That’s a great question. The one big differentiator is that we’re free, the biggest differentiator of all. We give, for free, advice across all of your accounts. The other big differentiator is coverage for 401(K) accounts which no one in the industry does, and needless to say, no one does it well. So, we use data, both CrowdSource from our clients and also from industry filings with the Department of Labor, to build up knowledge about individual 401(K) plans. If you look right now, Future Advisor supports on the order of, in this moment in time, about 30 or so, but at launch we will have launch support for 100 of the largest 401(K) plans in the country.

Zack: Are you just backing that information out from filings and stuff?

Bo: Yes…

Zack: Wow.

Bo: …so that you can come in and say, “I have this 401(K),” and we can say, “Hey, well it looks like you have a Zynga 401(K) or a Google 401(K),” and we know these are the 12 options, and in those 12 options, given your situation and where your other money is, here are the best funds in these proportions to invest in your 401(K). And here is the contribution split we recommend for future contributions. So, it answers a very specific question which is among the limited plan options, what do I pick and in what ratios?

Zack: This has been a huge nut to crack, so why do you think that it’s been so opaque, the 401(K)? So obviously, Yodlee can’t get access to that type of information. Are we just a few years away from that? Are we moving in that direction, or is that sort of like kept hidden away, sequestered from prying eyes?

Bo: Well, it’s a great question and I think that that there’s an entire groundswell of transparency that’s coming to the financial services industry. You saw, of course, the Department of Labor regulation coming up, I think, in April that requires more fee disclosure amongst 401(K)s. So, we fundamentally believe that transparency is coming, but it’s just not here yet and so we’re kind of pulling it along by using whatever sources are available to us, including filings and CrowdSource and data to bring the type quality and objective advice to people for their 401(K)s.

Zack: Cool, so you mentioned you’re free. So, I can come in, anybody can come in and there’s a free account, but the business model is that you do offer subscriptions. What do I get with subscriptions?

Bo: The key thing that you get with subscription is that you get more email alerts, and you get the chance to schedule one on one conversation with advisors on staff. The model here is very specifically part of our vision because traditionally money managers have taken a percentage of assets, but we don’t believe that, actually we know, that it’s not ten times more effort to manage ten times more money, nor should your advisors make more money just because you have worked hard and saved up more money.

So, the core software which scales gracefully for accounts of all sizes, is free for everyone, and if you have specific questions about your situation and want to talk to an advisor on staff, you can get a Gold or a Platinum Plan to do that, but in that way, we charge a flat fee for everyone so that we don’t make more money when you save up more money.

Zack: So, Bo, it’s obviously a dirty secret, but it’s no secret, but the financial industry makes money because people have no idea most of the time what they’re paying.

Bo: Correct.

Zack: So, people aren’t used to sitting out and writing a check or giving their credit card over to pay for these services, you’re asking for sort of a change in behavior. How big do you think a business like this could get?
I mean you’re talking about people, it doesn’t sound like a ton of money, I guess the premium, I don’t have it right in front of me, it was like $200 a year?

Bo: Yeah, the Platinum Plan is about $200 a year and the Gold Plan is $50 a year.

Zack: So, it’s not a lot of money, but again it’s still that user barrier of getting people just to reach into their pocket, right?

Bo: Yeah, that’s a great question and you’re right that the current financial services model of siphoning, I think that’s the best word for it, siphoning money from your account without you really knowing about it has worked grandly for them for decades. We believe both as young people, and also coming from the field of computer science, we believe that transparency will win in the end.

If you look at 30 years ago when you bought tickets from your travel agent, it wasn’t clear how much your travel agent was making off of you from that ticket purchase, but today it is, right, because you can price it yourself, and so transparency will win and value will move up the chain. And so, at some point people will realize what they’re paying, and once that happens, the transparency will win.

The interesting thing here is, if you look at ICI data, the percentage of U.S. retirement assets invested in index funds has gone up monotonically year by year since the early ’90s. It started at, I think, only one percent, 99% of assets were in an active fund, and is now nearing 20%, and it’s one of those few things that doesn’t move with the market. It doesn’t move with performance. People are just catching onto the index, investing low fee trading, every little bit at a time. It’s the curve, looks like the curve of a startup, right?

Zack: Yep. I saw recently that ETFs now have 1.5 trillion tracking them so…

Bo: Yeah.

Zack: …that’s part of the same move, I think.

Bo: Absolutely.

Zack: Go ahead, sorry.

Bo: We’ll be very careful to help guide investors in the right way because, as you saw, ETFs are now becoming active as well sometimes on the edges. We’re saying we’ll cut through all of the riff raff and help you find the right ETFs or mutual funds for your situation.

Zack: It’s a shame because I think part of that move towards active ETFs is just being able to charge higher fees. I don’t think the average investor understands the difference.

Bo: No, absolutely not, but we do things like, for example, with data from Morning Star and Lipper about the turnover of your fund and the fact that you hold the funds in a non-tax sheltered account, and we know your income, we actually calculate and these are part of the features that are here now and also will improve as the vision continues to be delivered. We can calculate how much your active manager’s turnover is costing you, and these are the kinds of things that we can bring to the table.

Zack: So, the product is launching next week, the 20th, you said?

Bo: Yes.

Zack: Can you talk to us about some of the other things we should expect to see out of you guys in the future, certain things that you’re working on that you can talk about?

Bo: Yeah, I can definitely talk in general about the direction we’re moving. We’re targeting long-term investing first, so we can take a single problem and nail it well, and then you’ll see from us a greater push towards ever more transparency, towards ever more education, and [inaudible 21:33] empower the individual investor. And so, like any good startup, we’ll do what our customers tell us they need and what they show that they need, and all in a single vector which to deliver on this vision, of empowering individual investors with free, actionable and personal advice to improve their financial futures.

Zack: Wow. Do you envision yourself ever really getting into the custody game or do you see that as antithetical to helping in that realm?

Bo: You know, that’s a prediction of the future that I’m not sure that I’m able to make right now.

Zack: Awesome. So, it’s a beautiful platform and I’m glad we had the opportunity to talk about it. I wish you the best of luck with the launch and everything.

Bo: Yeah, thanks so much and we’re super excited that we are on this kind of cusp of bringing transparency and lowering costs for the entire American investing public. Like you said, the more transparency we can bring and the more people realize what they’re paying, the less people will pay, and the less people pay, the more of their own money they get to keep and the less gets siphoned to Wall Street. If we can deliver that vision, we’ll be exceedingly happy with ourselves.

Zack: Well, just before I let you go, it feels like, I mean that’s an ethos obviously I share with you, but it’s also younger ethos. It’s a younger demographic, psychographic in that sense, so obviously anybody can use this platform. You built it for everybody. It’s extremely easy to use, easy to understand and it works, but are you targeting sort of the younger person?
Can you talk about that?

Bo: Yeah, absolutely. We didn’t set out to target the younger person at the cost of excluding older generations, but as you can imagine, if you have a financial services website, it tends to draw a pretty specific crowd, especially at the beginning. So, I would say that we have definitely targeted all investors who are staying in for the long-term.

Some things, for example, that we don’t do, we don’t help an investor already in retirement because that’s a different mathematical game, and it’s not something that we can do all at the same time, but we definitely try to target all investors and then across all demographics and across all sociographics, and we hope that along any [inaudible 24:05] story, there’s going to be early adopters. And then, there’s going to be your main middle We’re excited that the product is ready for everyone.

Zack: Awesome, Bo Lu, Founder of Future Advisor. Thanks for joining us on Tradestreaming today.

Bo: Thank you.

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