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Comprehensive Wealth Management

At FutureAdvisor, we believe that long term, fully diversified investing provides the best results over time. When you combine that with the diligent algorithmic monitoring that auto-rebalances your accounts, identifies tax-saving opportunities daily and manages all your multiple accounts, instead of just one, it’s a service that’s hard to beat.

Three Key Principles

  1. Diversification Diversification is a critically important tool available to every investor. We follow a ‘buy and rebalance’ strategy which invests in a diversified set of asset classes through low-fee funds. Our investment universe covers a global set of investment opportunities while remaining compact enough to create clarity of purpose for each investment.
  2. Risk management We believe that a portfolio should reduce risk as your time horizon approaches. This principle is built into our methodology through investment glidepaths, which decrease your portfolio’s allocation to equities and increase your allocation to bonds over time as you approach your goal’s time horizon. Your personal risk preferences determine which glidepath is most appropriate for you.
  3. Tax awareness Our methodology incorporates tax consequences of investment decisions where appropriate, such as allocating your holdings in a tax-efficient way (e.g. bonds in tax-sheltered accounts), avoiding unnecessary capital gains taxes, or opportunistically harvesting tax losses.
Our Investment Algorithm

Our methodology has two components, an asset allocation strategy that determines your optimal target asset allocation and a portfolio management algorithm that handles the day-to-day work of keeping your portfolio allocation close to your optimal target. Your target asset allocation is computed using several inputs and assumptions including FutureAdvisor’s asset class universe, your investment horizon (e.g. years to retirement) and your personal risk preferences. The portfolio management algorithm analyzes your portfolio daily to determine how to invest new cash deposits, rebalance your portfolio*, or harvest losses for purposes of tax reduction.

Your Asset Allocation

Our portfolio recommendations are based on your information. Here’s why:

  1. Asset classes Asset classes are groups of securities that share similar risk characteristics. These security groups can be defined in broad categories, such as stocks and bonds, and in finer categories, such as domestic stocks vs. foreign stocks. Our use of asset classes simplify the investment universe, consisting potentially of thousands of individual securities, into a more tractable set of investment options.
  2. The risk-reward trade off The reward and the reason for investing is the potential for positive investment returns. Our investment methodology uses long run evidence on the returns delivered by different asset classes as a key input. However, investment portfolios are exposed to various kinds of risks, including domestic and foreign economic performance, interest rate, inflation, and more. Your overall portfolio risk is the result of the interactions between all the risks within your portfolio. Volatility is a way to measure of your portfolio risk in a single number. It represents the variability of the returns you will likely experience. For most diversified portfolios, volatility will vary between 5% (less risky, mostly bond portfolio) and 15% (riskier, mostly stock portfolio).

Diversification

Our asset allocation strategy incorporates Modern Portfolio Theory, which suggests that investors should build portfolios that are as well diversified as possible among assets expected to provide positive long term return. Diversification happens at two levels: within each asset class and between the asset classes. Both kinds of diversification are necessary to hold an efficient portfolio.

  • Diversification within an asset class For a given asset class, we prefer to invest in a large set of companies, which greatly reduces company risk. Company risk is your portfolio’s exposure to any single company, corporate bond, real estate investment trust, etc., and these risks are not worth taking, they are uncompensated. By investing in a large set of companies, individual company risks primarily cancel each other out, leaving only compensated market risks. For example, the Vanguard Total Stock Market ETF attempts to mimic the returns of the CRSP US Total Market Index, which is based on the returns of over 4,000 US stocks. ETFs are an effective way to gain exposure to an asset class, removing the excessive risks specific to concentrated positions in individual companies.
  • Diversification across asset classes This avoids over-concentration in certain market risks, the portfolio risk caused by larger economic factors. Unlike company risk, which are not compensated and which we prefer to avoid as much as possible, market risks are the source of long term return and cannot be avoided if we want to achieve higher levels of returns. Some market risks are off-setting to one another. For example, in recent times interest rate risk has frequently helped to offset economic risk, since when the economic outlook turns down, long term Treasury bonds yields have fallen and their market values have significantly increased. Use of multiple asset classes helps take advantage of these off-setting behaviors to reduce overall portfolio risk, a classic example of beneficial diversification.

Investment Time Horizon and Risk Tolerance

There is no single right answer for how much risk you should take. There are many well-diversified portfolios, each with its own different risk-reward tradeoff. Our recommended risk level is based on your risk tolerance and our investment team’s views on how to best save for retirement.

Managing Your Portfolio: Main Features

Our management algorithm is a mathematical optimization engine that decides daily if trading is beneficial to your portfolio. It weighs the need for rebalancing against transaction fees, capital gains taxes, and other costs.

A portfolio usually drifts from its target allocation over time and periodic rebalancing is required to keep it on target. For example, if stocks outperform bonds, an on-target 50/50 stock/bond portfolio could become a 60/40 portfolio, deviating from the target allocation and risk level. Keeping your portfolio balanced is a major factor in our algorithm’s decision-making process.

In most cases, our portfolio rebalancing algorithm is designed to limit realized short-term capital gains to the greater of $200 or 5% of the position value.  Exceptions may be made in certain circumstances, including liquidating a position to avoid fund fees or future transaction costs, and in order to meet cash targets such as strategic cash allocations or client instructions to hold or increase cash.  With respect to long-term gains, the service will balance a variety of factors within the portfolio to determine optimal treatment, considering your years to goal, portfolio size, cash needs, and the potential diversification impact of a given set of transactions.  Rebalancing a portfolio may cause investors to incur tax liabilities. References to tax strategies that FutureAdvisor considers in managing accounts should not be confused with tax advice. FutureAdvisor does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

Tax-Loss Harvesting

Tax-loss harvesting is an investment technique that helps save you money by deferring taxes – sometimes indefinitely. If the value of one of your investments falls, in a market downturn for example, FutureAdvisor can sell the position to realize the loss, and use it to offset taxable gains elsewhere in your portfolio. Such sales are known as “loss harvesting,” and because they are performed with regard to taxes, the entire technique is called “tax-loss harvesting.” Our algorithm will prevent wash sales that invalidate the tax loss^, and we do not require a minimum balance for this service.

This technique helps decrease your overall tax bill, and helps you preserve your wealth even when the markets drop. FutureAdvisor has fine-tuned its tax-loss harvesting algorithms to make them useful for accounts as small as $20,000. We do not impose an artificial minimum for this service, and we plan to apply tax-loss harvesting to even smaller accounts in the future.

Other Considerations in Managing Your Portfolio

Our algorithm also considers:

  • Transaction and trading costs Our algorithm considers per trade fees^^ and bid-ask spread cost. These two considerations are important to prevent trading that is of small benefit.
  • Tax efficient asset placement Bonds and real estate assets generate high amounts of taxable income. To the extent possible, our algorithm places such assets into your tax-advantaged accounts.
  • Withdrawing cash If you need to withdraw cash from your portfolio, our algorithm will sell the appropriate holdings to raise cash while keeping your remaining assets well-diversified.

*Due to the nature of the financial markets, portfolios will drift from their targets over time, we will rebalance them towards the target allocation periodically.

^Wash sales can still occur due to trades outside your FutureAdvisor-managed accounts.

^^These fees depend on the custodian and product.

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