SAN FRANCISCO - Good news for high-end wealth management firms: There's at least one so-called robo advisor that doesn't want your clients.
Online RIA
And Lu thinks millions of those investors are there for the taking. "Our goal is to serve more customers, serve them better, and become the next financial service organization for the middle class," says the former Microsoft product manager, who started the company four years ago.
Only about 20% of the mass affluent market have a financial advisor, he notes, compared with around 60% of individuals with more than $1 million in investable assets. "It's an artificial gap," he says. "We believe we can fill it."
VC BACKING
It's a tall order, to be sure, and even more formidable for a firm that only has around $200 million in assets under management and several thousand clients with an average account size of about $140,000.
Yet Lu says he has the luxury of venture capital funding, allowing the company to ignore profitability -- or the lack thereof -- for now. "We're not measuring ourselves by profitability," he says. "It would be a tremendous waste of everybody's time if we eked out $2 million in profit."
To date, FutureAdvisor has raised $21.5 million in funding from some prominent Silicon Valley venture capitalists -- including Sequoia Capital, an early investor in Google, and Canvas Venture Fund -- and more is expected to come next year.
And those funders have big hopes for the company.
FutureAdvisor's brand of digital service will "absolutely" cause disruption in the advisory business, says Rebecca Lynn, a general partner at Canvas. "They are securing relations with customers whose average net worth is growing incrementally in value over time," she says. "Historically, [charging] 1% to 2% to manage money for people with under $1 million to invest has not proven to be a good model."
COMPETING WITH ADVISORS?
Indeed, FutureAdvisor's mass market focus keeps it out of direct competition with traditional advisors, says Lu. "We're not taking existing share," he says. 'We're creating more pie, not taking a slice of the pie. In fact, about 80% of our clients have never had a financial advisor before."
The typical FutureAdvisor client is a mid-career professional, according to Lu. That "core middle class" American who is busy with life and work is the market FutureAdvisor is counting on to challenge the established financial service companies, Lu says.
"If you ask the typical client Schwab client, who logs on and has to figure out what to buy and sell on a regular basis, if they would rather do that or have someone else do it for a low fee, I think it breaks 80/20 in our favor," Lu asserts.
$10,000 MINIMUM
What's more, FutureAdvisor is happy to take clients with assets most traditional advisors consider too low.
The RIA, which launched with free financial advice and began its paid wealth management service last year, has a $10,000 minimum, charges 50 basis points and allows clients to keep their existing accounts with other advisory firms or custodians, while it manages the accounts.
FutureAdvisor continues to offer free online advice tools; like other digital advisors, it monitors and rebalances accounts, does tax-loss harvesting and make ETF-oriented portfolio recommendations using proprietary algorithms.
One executive from a major national financial services firm compares the rise of FutureAdvisor and other online advisors to the evolution of the ETF industry.
"In the beginning, everyone said they couldn't make any money because their fees were too low," recounts the executive, who asked not to be identified. "But they continued to gather assets -- and 10 years later, they have market share and incremental profits on every new customer."
Lu does not dispute the analogy. "What ETFs did for financial instruments," he claims, "we're doing for financial advice."
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