What trends does a co-founder of a robo advisor see in terms of college financial planning?
This article features an interview with Bo Lu, Co-founder and CEO of FutureAdvisor. This interview originally ran in the 529 Dash e-newsletter in 2015, and we are now reposting the content from the e-newsletter to the website due to the subsequent launch of our 529 Insiders website. Since 2015, FutureAdvisor no longer offers the 529 service to new clients. Based in San Francisco, California, Bo’s insight is built upon working as the co-founder and CEO of FutureAdvisor for almost seven years. In the beginning, the firm was founded with his friend of Jon Xu through Y Combinator and sought to provide institutional grade digital investment management to the everyday American family nationwide. In 2015, the firm was acquired by BlackRock and Bo Lu continues to run the 100+ team independently from their offices in San Francisco. Prior to FutureAdvisor, Bo Lu graduated from the University of Illinois at Urbana-Champaign in 2004 and worked with Microsoft as a product planner and program manager from 2004 to 2010. You can learn more about Bo Lu and FutureAdvisor at https://www.futureadvisor.com. Last but not least, thank you Bo for your time, insight and support for working with me on the article. Please read the question and answers to learn about his perspective on college financial planning, and hope that the article provides you with an opportunity to learn more from your peers.
Question 1 (Paul Curley, Editor of the 529 Dash): How did you identify the need for the tool?
Answer 1 (Bo Lu, Co-founder and CEO of FutureAdvisor): Most of our customers are investing for their own retirement as well as other long-term goals. For retirement, we manage brokerage accounts and IRAs. Many of them had asked us if we managed educational savings accounts, and it hurt to keep on saying no. College tuition and retirement are the two most important long-term for most US investors. So when we had a chance to add to our service, this made sense.
Question 2: How are you solving this need?
Answer 2: We had to solve a few different problems to give our customers a useful product.
1) Typically, educational savings accounts require a fair amount of paperwork to set up, so we had to create a simple online form that lets people create the accounts from our website.
2) There are four different types of savings account investors use for educational purposes — 529s, Coverdell ESAs, UTMAs and UGMAs — and choosing the right ones can be confusing. Our product includes a wizard that selects the right accounts based on the investors stated needs.
3) Most investors don’t know how much money they’ll need to cover educational costs, so the product includes a college savings calculator that lets people know how much they need to save monthly to stay on track.
4) To afford college, parents need to contribute on a regular basis. We automate monthly contributions to their accounts so that they stay on track.
5) We are a passive investment manager that adheres to Modern Portfolio Theory. We believe the best strategy is a balanced, diversified and low-fee portfolio, and we manage education investment accounts with low fees and diversification in mind. Rebalancing happens automatically across all investor accounts.
6) We automate disbursement of the college savings to the proper institution, so that the investor doesn’t have to touch it. This is the most tax-efficient way to transfer the assets. Some accounts also give investors flexibility to use money for other, non-educational purposes as well. We do all that for free using low-fee 529 plans.
Question 3: What have you learned based on your success to date?
Answer 3: We’ve learned to keep the product simple. We tell investors three things: where they’re at, where they need to be to reach their goals, and what they can do to get there. That’s it.
Behind the scenes, we have very complex algorithms running, and our users can dig in as deep as they want to understand why we do what we do. But the key to serving the tens of millions of households that have never had investment management before (for retirement or college savings), is to give them a clean online experience with really clear visuals that speak to them.
Question 4: How can product providers and states better support you?
Answer 4: Product providers can make sure more low-fee index-like funds are available in state plans. For the moment, we are only able to manage state 529 plans on Fidelity and TD Ameritrade. States can support us by either moving to a custodian where we can manage their plans, or by pushing their present custodians to integrate with our technology.
Question 5: What do you see as trends in college financial planning?
Answer 5: Our service is like Turbo-Tax. It’s going to transform the way people save and invest for college, by making the process much, much easier. There are folks in Washington who are trying to solve the student debt crisis with policy. We think technology has an equally important role to play, by making current tools like 529s much more accessible and effective.
Question 6: Is there a question that I should have asked that you would like to answer?
Answer 6: Yes. This service represents something brand new. We don’t know of any other like it. In the beginning, when something new is introduced, people don’t know how to think about it, or how to judge whether it is good. That is only proven by making one user after another grateful that this new thing exists. And that’s what we’re planning to do.
Editor’s Final Note: Thank you Bo Lu for your time and insight for this article. Also, I would like to provide a special thank you to the readers for learning from your peers, for your support and your engagement.