Pity the forgotten middle – the 32 million US households that have between $100,000 and $1 million ready to invest, but no one to advise them.
Financial advisers regard them as too small, and banks might offer them a “premier” service with regards to chequing and banking, but don’t consider these clients profitable enough to advise on how to manage their wealth.
This gap was spotted by Bo Lu, CEO and co-founder of FutureAdvisor, an online advisory platform and portfolio manager.
In the US, those with more than $1 million have a 60% chance of having an adviser. That likelihood drops to 20% and below for anyone with less.
Bo Lu, CEO and co-founder of FutureAdvisor
Lu says: “In America, when it comes to wealth management, we seem to say: ‘Hey, if you are rich, we will take care of you, and if you’re not, good luck.’ The only way to fix that was with software.”
Lu started FutureAdvisor in 2010, and last week the firm announced its series B funding. More than 100,000 Americans use the company’s free online advisory platform. The product looks at a user’s accounts – joint accounts, IRAs, mortgage and loans – and using a patented algorithm will calculate the “correct” portfolio and tax-efficient allocation for the user’s age, demographic and risk appetite.
FutureAdvisor also offers a paid-for discretionary managed product, which will rebalance a user’s portfolio continuously between their accounts and investments. As much as possible, the user’s current funds are retained to avoid churning fees, and elsewhere index funds are selected.
“It’s not about beating the markets, but rather managing the whole portfolio holistically and keeping it competitive,” says Lu. “Often it’s simply a case of letting the user know they are paying too much in fees in some of the products they are using, that they are taking some unnecessary risks, and are not best aligned from a tax perspective.”
Using software rather than manpower, FutureAdvisor has gone from having $13 million in assets under management in September to more than $118 million, with just 25 employees.
While Lu insists his company is not a competitor to wealth managers or financial advisers, FutureAdvisor is likely to disrupt those industries. Eighty per cent of its users have never had an adviser and so will become used to the lower costs afforded by an automated advice.
The users are also about 25 years younger than the average premier banking client – it’s a clear indicator of the generational differences in how individuals choose to interact with their wealth advisers.
“It’s not that institutions don’t want to be in this space, or that they haven’t tried,” says Lu. “But it’s hard with their legacy systems to develop something new that fills a gap in the market, and also can be perceived by some managers as a threat to existing business lines elsewhere in the firm.
“That’s an advantage for new and digital firms like us as we step in.”