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Investing

futureadvisor-review

Investing isn’t always easy. Sometimes you need a friendly guide to point you toward opportunities and help you keep things organized.

Sometimes that friendly guide is a robot.

This is the premise of a service called FutureAdvisor. The company essentially provides a robo-advisor that offers automated portfolio management, which users can access online.

FutureAdvisor uses computer algorithms to manage your investments and balance your portfolio. Is FutureAdvisor the tool that do-it-yourself investors have been dreaming about?

The big perk of using a service like this is that it costs significantly less than hiring a human financial consultant to manage your portfolio and offer advice. This means that people who would never seek out professional financial services in the past can now get affordable investing help.

However, an automated service comes with limitations that may turn some customers off. Find out if a robot offers the best way to plan for your future from behind your computer screen in this FutureAdvisor review.

The Philosophy Behind FutureAdvisor

The first thing you’ll do when signing up for FutureAdvisor is fill out a questionnaire. This allows the company to create a customized investment plan according to your needs and goals.

The plan created for you will be based on the following factors:

  • Age
  • Risk tolerance
  • Portfolio size and holdings
  • Desired retirement age

The act of simply sitting down to identify your goals in realistic terms can make a big difference. This tool makes it easy to make your goals a reality, based on your time and resources.

The Benefits of a Free FutureAdvisor Account

FutureAdvisor really succeeds at delivering a tool that makes it easy to organize and manage your investments.

Learn More: Can You Trust Your Financial Advisor? Or Anyone?

One highlight is that the service actually offers a free retirement analysis for users. You can link your investment accounts and receive tailored recommendations based on your portfolio and goals. FutureAdvisor can actually make recommendations for accounts held with any broker.

Another thing that’s refreshing is that the free services offered by FutureAdvisor aren’t simply part of a trial program. You can use of the company’s free services for as long as you’d like without making a commitment to upgrade to a paid account.

What a FutureAdvisor Premium Account Has to Offer

You will have to move to a FutureAdvisor Premium account if you want this program to do some fancy, complicated investing work for you.

FutureAdvisor Premium charges a management fee of 0.50 percent. A paid account gives you access to direct investment management, however, which may be well worth the cost.

One thing worth mentioning is that you will need to have a Fidelity account if you specifically want to receive free management of a 401(k). In addition, a 401(k) must have a minimum balance of $10,000 in order to qualify.

Resource: How to Determine Your 401(k) Fees

One of the real perks of this program is that it offers tax-loss harvesting. This is an important feature because amateur investors in the past couldn’t access this service without working with a professional advisor.

An interesting thing to note is that each trade is monitored by both a real person and the company’s electronic investing algorithm.

A paid FutureAdvisor account gives you access to a team of financial consultants during weekdays. You have the option to chat via live messages, email, or even over the phone. You can also make an appointment with a member of the FutureAdvisor team if you need more complex help.

Of course, you may not want to get highly involved with actual investment professionals. That’s because it offers a low-key, hands-off approach to managing investments, which is attractive to many investors.

FutureAdvisor will monitor and balance your account daily according to market movements, which may be enough for you.

Why FutureAdvisor Might Not Be Your Perfect Financial Match

FutureAdvisor isn’t without its limitations.

One aspect of the program that may disappoint you is that it isn’t open to everyone. FutureAdvisor Premium accounts are only open to people between the ages of 18 and 68. The company is interested in helping younger customers move their way toward retirement instead of managing the assets of people who are already there.

The other big factor that could make FutureAdvisor a poor fit for your needs is that customers need to have at least $10,000 in investable assets. While that may seem like a big number, it is actually significantly lower than the minimum requirement of similar online financial services.

Related: What I Learned as a Financial Planner

Should FutureAdvisor Be a Part of Your Financial Future?

The beauty of FutureAdvisor is that you can start from wherever you are right now. There is no need to transfer accounts or make big changes in order to manage your retirement savings, checking account, stocks, bonds, and CDs, all in one place.

Signing up for a free membership is a low-risk way to get your toes wet in the world of professional investment management. Especially if you’re just getting started with planning your future.

FutureAdvisor provides a nice middle ground between committing to a traditional advising firm and being overly casual with your financial future. This program could help you avoid living with financial regrets later in life, especially if you’re not the type to seek out one-on-one professional advice.

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No investment is without risk. You may feel safe when you do what financial advisers consider the “right thing” — invest in a broad stock market index fund with a long-term view — but there is risk there as well.

invest risk

Unfortunately, to build wealth over time, investors need to accept a significant amount of risk. Leaving money in risk-free investments, such as high-yield savings accounts, isn’t really investing at all. By taking on very little risk, keeping the bulk of your wealth in a savings account practically guarantees you’ll lose purchasing power over the long term due to the rising costs of goods that you might buy with that money.

Most middle class investors will need to grow wealth, rather than just preserve it, if financial independence is their end goal. So, just know that if you’re interested in growing your wealth over long periods of time, you’ll need to consider riskier investments than savings accounts.

Different Products, Different Risks

There is a dizzying selection of investment types scattered across the entire risk spectrum. These range from money market funds (low-risk investments, similar to savings accounts) to complex financial derivatives (risky financial moves often best left to professional investors).

Anyone who has ever invested in a 401(k) plan has had the opportunity to be familiar with risk profiling. To help you design your retirement portfolio, most 401(k) managers allow you to select your investments based on your appetite for risk. By asking the investor several questions about how they would react to different levels of investment performance, these 401(k) tools will categorize the investor based on their own, personal risk tolerance: usually low, medium, and high.

Measuring and evaluating the risk involved in any investment is a little more complex, though. While an investor’s risk tolerance can be categorized or marked on a scale, an investment’s risk should be plotted using several dimensions. To evaluate an investment, you should consider the different types of risk that could affect its performance in order to determine whether the investment is appropriate for you.

Resource: How to Evaluate an Investment Portfolio

Market risk

Market risk considers a broader picture. If you are invested in stocks, particularly if you choose the less expensive (but not necessarily safer) route of investing in a broad stock-based index fund, you have to accept that the overall economic condition of the country — or even the world — will cause your investment’s value to fluctuate. Market risk is relevant also for investments in single companies, bonds, or other products.

A market crash or decline could crush this investment’s performance, even if the quality of your investment remains the same. Investments also follow trends. For several decades, real estate could appear to be a “good” investment, encouraging more people to buy real estate and driving up prices for everyone else. Once the overall sentiment of investors switches to the belief that real estate is overpriced, your property could lose potential value… even though the structure hasn’t changed.

Learn More: 3 Keys to Deciding If Your Real Estate Is a Good Investment

Default risk

Default risk is related to the quality of the underlying investment, and is more apparent when investing in a single company through stocks or bonds. If you invest in a company’s or municipality’s bond, you generally expect a guaranteed return. The promised return is usually higher than what a savings account would provide, but you face the risk of default. If the company files for bankruptcy or if the municipality is mismanaged, it’s possible you won’t receive the return you were promised.

Pensions, thought to be stable investments for retirements, are also exposed to default risk. Today, your company may be promising all retirees access to free health care, but if your company later restructures, that promised benefit might disappear. The government offers a type of insurance for companies that offer pensions, but sometimes that insurance isn’t enough to ensure all pensioners receive exactly what had been promised.

Inflation risk

Financial planners like to assume that inflation runs about 3 or 4 percent a year over long periods of time. This allows planners and investors to calculate the expected “real” returns for an investment. If you assume inflation is 3 percent and your savings account earns 1 percent APY, your real return is a loss of 2 percent a year. This real return takes the effect of inflation into account.

There is a chance, however, that during any particular time, the measure of inflation — or for a more accurate description in this case, the increase of the cost of goods — is significantly more than 3 percent. If the country were to enter a period of hyperinflation, investments in your savings account would result in devastating losses when compared to consumer prices. (At least until banks began to offer more appropriate interest rates.) When a gallon of milk costs $25, a gallon of gasoline costs $30, and a movie ticket costs $75, it will be much harder to get by on the same income you had with today’s prices.

Mortality risk

Consider mortality risk when you have or are considering investments in pensions, insurance contracts, annuities, or any investment with a long-term horizon.

Skydiving

Annuities are the best examples. If your annuity payments or distributions to you continue only as long as you’re alive, you run the risk of dying before you receive enough of your benefit to make the premium payments and fees worthwhile. If your investment strategy focuses solely on the long-term, there is a chance that you will never live to enjoy the benefits.

Life is short. It’s almost always shorter than you would like for it to be. But realize that mortality risk runs in the opposite direction, as well. If you live longer than expected, and you have tried to plan your financial life so you fully expend your wealth during retirement, you run the risk of running out of money.

Related: Should You Take a Lump Sum for Your Pension?

Spend some time to think about the risks of your investments. You may discover that your tolerance for risk is lower or higher than you expected. Perhaps you’ll need to adjust to accept more risk in order to meet your financial goals.

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In your personal finance journey, you may or may not have come across peer-to-peer (P2P) lending platforms. The great news is, these have proven to be solid investments over the past few years, providing much higher returns than what you could earn on bank investments. But we have to wonder:  will P2P platforms continue to be reliable investments, particularly if the economy begins to weaken?

p2p

Since P2P lending only got its start in the early 2000s, we don’t have a particularly strong or reliable track record to fall back on. The first platforms only began coming on line as the last recession – the Financial Meltdown – was unfolding. So while they have been a picture of success since their inception, we don’t really know how they’ll hold up under pressure.

What Effect a Weakening Economy Might have on P2P Lending

In the absence of any substantial performance data from the last recession, we can only speculate what effect a weak economy will have on P2P lending. But we can rely on the general performance of loans in past recessions for strong clues.

When the economy declines, asset prices fall and unemployment rises. In turn, default rates on virtually all types of loans rise. Since P2P loans are unsecured and taken for a variety of purposes, they most closely relate to credit cards.

According to the Federal Reserve, credit card default rates were at 2.34% at the end of 2016. However, they hit a high of 6.77% during the second quarter of 2009, in the middle of the Financial Meltdown.

While P2P loans are priced to accommodate certain default levels, they are based on the most recent default experience. Should default rates rise to something close to what they were in 2009, P2P loans priced based on today’s default rates will likely suffer disproportionate losses in interest rate return.

The Flood of Institutional Money Might Weaken Lending Standards

The basic concept of P2P lending is simple. Individual borrowers come to lending sites in search of loans, which will ultimately be funded by individual investors. But as interest rates have continued low, institutional participation in P2P lending has grown, as banks and other large lenders seek higher returns. For example, Lending Club recently reported that banks funded 31% of loan originations in the fourth quarter of 2016, compared with 13% in the third quarter.

One of the concerns over increased institutional participation is loan quality. As institutions bring larger amounts of capital into the space, loan quality may decline. That can happen as P2P lenders lower underwriting standards in order to draw in a larger number of loans. As they do, the quality of those loans will gradually decline, eventually increasing the rate of default.

It remains to be seen if that will play out as a worst-case scenario. However, not only is the industry itself relatively new, but institutional participation is only very recent. That means that the impact of greater institutional participation has yet to be felt.

Lending Club’s 2016 Scandal

In May of 2016, Lending Club’s CEO, Renaud Laplanche, was forced to resign amid a scandal. A summary of the event disclosed that:

Lending Club conducted a review, under the supervision of a sub-committee of the board of directors and with the assistance of independent outside counsel and other advisors, regarding non-conforming sales to a single, accredited institutional investor of $22 million of near-prime loans. The loans in question failed to conform to the investor’s express instructions as to a non-credit and non-pricing element. Certain personnel apparently were aware that the sale did not meet the investor’s criteria…The review further discovered another matter unrelated to the sale of the loans, involving a failure to inform the board’s Risk Committee of personal interests held in a third party fund while the Company was contemplating an investment in the same fund.

Since Laplanche’s resignation, earnings have gone negative three quarters in a row. What’s more, the pattern of losses are expected to continue through 2017. The company is forecasting losses of $69 million to $84 million, on revenue in the range of $565 million to $595 million for the year. The company cites the loss of investors in the aftermath of last year’s scandal.

We should reasonably expect that Lending Club, as the largest platform in the P2P space, will recover. However the episode should serve as a warning that the development of P2P lending won’t necessarily be an elevator ride straight up. With the number of P2P lenders increasing steadily, there are bound to be more negative surprises.

Read More About Reducing Risk With Lending Club here.

That might make a strong case for spreading your P2P investments across several lending platforms.

The Nature of P2P Loans Themselves

Despite the positive overall performance of P2P lending over the past few years, the practice contains two built-in issues.

The first is the fact that the loans are largely comprised of debt consolidation loans. Though such a loan can potentially improve a borrower’s financial situation by lowering the interest rate and monthly payment that he or she is paying, it also holds the potential to borrow even more money.

For example, many borrowers engage in serial debt consolidation. They have a few credit cards, and then do a debt consolidation to lower the monthly payment. But one or two years into the debt consolidation, and they rack up more credit cards. Eventually, there’s another debt consolidation – and maybe even a third, and a fourth.

From a risk standpoint, the problem is that the borrower is never actually paying off debt. Often, the debt consolidation simply sets the stage for the next round of borrowing. As that cycle continues, the risk of default on the latest debt consolidation loan increases.

The second major concern is that most P2P loans are unsecured. Borrowers can typically take loans as high as $40,000, and for nearly any purpose, without having to put up any collateral. In the event of a loan default, there will be no assets to seize in order to satisfy the debt.

In an economy with low unemployment, low interest rates, and rising asset prices, neither issue is a major concern. But when the economy eventually weakens, both run more than a slight chance of becoming more pronounced.

Positioning Your P2P Portfolio for Leaner Times

All of this should be a reminder that P2P lending, like virtually all other types of investing, is not completely risk-free. And despite recent healthy performance, the situation could change — and change dramatically — in the event of an economic slowdown.

None of this is to discourage investing in P2P lending. Since the next recession is virtually inevitable, though, now is the time to prepare your investments for a change in circumstances.

Prepare Now: Sweat In Up Markets So You Don’t Bleed In Down Markets

How can you protect yourself?

  • As noted earlier, consider investing on several P2P lending platforms. That will minimize the risks associated with any one platform.
  • Don’t use P2P investing as a substitute for the fixed income portion of your portfolio. Instead, make it part of your fixed income investments, to offset and increase the lower rates paid on traditional but safer fixed income investments. You should have both P2P and traditional fixed income investments.
  • Invest across various risk grades, despite the fact that returns may be higher on the weaker grades. Lending Club’s Statistics page (“Loan Performance Details” chart) shows that default rates increase substantially with each lower credit grade.

In regard to the last item in particular, it’s important to realize that default rates are likely to increase more dramatically in the lower credit grades in the face of a bad economy. Those are, after all, the highest risk loans being made.

We don’t have much information available as to how well P2P investing performed in the last recession. But that makes it even more important, at this late stage of the current economic recovery, to make some reasonable assumptions about what’s likely to play out. This will allow us to best prepare for it.

How do you think P2P investing will do when the economy takes the next nosedive?

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Apple CashIn 1977, Steve Jobs and Steve Wozniak incorporated a little start-up company called Apple Computer. For the first 25 years of Apple’s existence, they were simply a personal computer company, one which plugged in millions of Americans across the country.

For the last 15 years, however, Apple has been everything else. They’ve been music players, phone creators, watch makers, etc., and the success of the company has exploded to the tune of a $718B current market evaluation.

Strangely though, Apple has always (even now) hoarded cash. The most recent quarterly report shows Apple (APPL) sitting on a whopping $245 billion in cash. To put this into perspective, only one other US corporation has over $100 billion in cash, and that’s Microsoft — at just under $105 billion.

This means that Apple has more than double the amount of cash on hand than any other company in the United States, and this really isn’t new for them either. For the last decade, Apple has led the US in cash hoarding, slowly and steadily increasing their cash reserves year over year by about 10 percent. For a company to have a third of its value come from cash is not uncommon. What is uncommon, though, is for a company to have $245 billion on hand, with no apparent plan or desire to spend it.

Apple is currently the highest-valued company on the NYSE. In fact, the amount of cash they have on-hand could buy all but about 15 current corporations. So, will Apple ever actually decide to buy a few companies, and expand itself beyond the tech industry? Let’s play around a bit.

Three Possible Landing Spots for Apple Cash

 

Netflix LogoNETFLIX – Years ago, when Netflix made its entrance, its stock could be had for under $3 a share. Today, it’s a company valued at $61 billion, which does a whole lot more than deliver DVDs through the mail. House of Cards, Orange is the New Black, and The Crown are just some of the original programming Netflix is offering up today, and Netflix recently signed a music publishing deal with BMG Rights Management. Emmy awards be damned, Netflix is coming after the Grammys!

So, how does Apple fit in? Well, there might be a way for Apple to use its technology to enhance the current Netflix portfolio, in terms of streaming or making it more accessible on the iPhone or Apple Watch. The most likely reasoning for Apple to acquire Netflix, though, is simply expansion. Just as Apple was tired of building computers only 15 years ago, they may have grown tired of building just computers, watches, and phones now. Perhaps they are looking to increase the breadth of the company. With Amazon attempting to do a little of everything these days, Apple could consider something similar.

Tesla LogoTESLA – Shhhh, don’t tell anyone but Apple has likely been working on an electric car for a while now. Rumor has it that a few years ago, Apple purchased a lot of property in Sunnyvale California under the shell company name “SixtyEight Research.” Under the name “Project Titan,” Apple appears to be developing software for autonomous vehicles, and the hope is to have a release date somewhere around 2021. If, however, things take a turn for the worst and Apple is not able to develop the software or the car they desire, I think a company like Tesla is a terrific fit for the Apple portfolio.

Not only is Tesla an automaker, but it’s also an energy company with the acquisition of Solar City. Imagine a day where you drive home in your Apple car, enter your home using a code on your Apple security system, and then power your entire house with a single, solar cell battery. That’s the vision of Elon Musk (without the Apple part right now)… and if Tesla can deliver on their promise of an affordable T3, I truly believe the company will be Apple’s number one target for years.

Twitter LogoTWITTERTwitter is in a tailspin. Quarter after quarter, the company continues to lose hundreds of millions of dollars with no end in sight. For a website and a business that draws some of the most online traffic, it’s becoming more of a Shakespearean tragedy than a solid business model. CEO Jack Dorsey appears to have only one viable method for making Twitter profitable for investors: a sale.

Is there a way for Apple to swoop in and make Twitter a successful company? Maybe. And it’s clear that the constant talk of a Twitter sale is doing the company no favors; in the last three years, the company has gone from a $43 billion evaluation to just $11 billion. So, Apple may want to wait another few quarters to try to buy Twitter at an even lower price tag.

Working online for 10 years myself, I can only imagine the kind of revenue and potential a site would have when it drives millions of visits a day. I believe Apple is the kind of innovative company that could make Twitter a winner.

What the Future Holds

It’s somewhat concerning to me that a company of Apple’s size and magnitude is hoarding as much cash as they are. We’ve gone from the original iPhone to the soon-to-be-released, $1,000 iPhone 8, and there hasn’t been as much innovation as you’d expect from the most valuable US company in existence. Sure, the new iPhone might have a curved screen and will ditch their proprietary lightning port in favor of a standard USB charger (why, I have no idea), but it’s still just a phone. It would be nice to see them go bigger and better on other technological advances and the acquisition of one of the three above companies could do the trick.

Besides, if Apple buys a company like Twitter and it still bleeds money, Apple will “only” be left with $230 billion. I think they’ll manage.

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Trump Nixes the Fiduciary Rule Today… Is This A Good Idea?

by Stephanie Colestock

If you’ve been paying attention to financial news, you’ve probably heard mention of the fiduciary rule. This rule was approved last year under the Obama administration, with the goal of increasing transparency within the investment realm. It was designed to force advisors to suggest investment products to their clients that were more affordable, rather than […]

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Where Can I Buy Bitcoin Online?

by Michael Pruser

Full disclosure alert, I’m a bit of a bitcoin junkie.  Globally, access to bitcoin is much easier with dozens of funding methods for international investors. However, the US of A has yet to embrace the bitcoin, so being able to buy and sell the cryptocurrency is a lot harder than you might think. When bitcoin started […]

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The Financial Checklist Manifesto

by Jeff

There are so many different ways to organize, prioritize, and classify your tasks and responsibilities. You’d probably need a couple years just to sort through all of them on your own. You can have an organizer on your computer, your phone, in your pocket, or a notebook. If you’re short of paper, you can just […]

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Year End Reminder: Change Your 401(k) Contribution Level Now

by Luke Landes
Winter Snow

At the end of the year, most people in the United States are thinking about the holidays and the potential credit card bills for gifts and family visits. One good way to control this potentially stressful month is to take some time to breathe and get your own finances in order. There are several actions […]

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Will Traditional Retirement Accounts Allow You to Retire Early?

by Aliyyah Camp

If you plan to retire early, you may be wondering whether it makes sense to invest in traditional retirement accounts, such as employer-sponsored 401(k)s/403(b)s and IRAs/Roth IRAs. The speculation comes into play because there’s an early withdrawal penalty when you take money out of these accounts before age 59 ½. I argue that it’s still […]

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Can You Earn More With a Fidelity CD Ladder?

by Mark Hull

It’s been a long time since banks offered savings accounts with decent returns. The Fed may raise interest this year, meaning rates could finally rise. In the meantime, what do you do? If you’re looking for a quick way to create an investment vehicle that is FDIC insured, and promises greater returns than online savings, […]

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