CNBC: So you are working with the mutual fund companies and brokerage custodians to steal the next generation of business from financial advisors?
Lu: Think of investment management as three layers. The manufacturing layer is the mutual funds and ETFs. Then there are the custodians, such as Fidelity Investments and TD Ameritrade, both of whom we work with. The third layer is the advisor—for example, LPL Financial or Raymond James and, at the highest end, Goldman Sachs and other Wall Street private bank groups. We are additive to that topmost layer. We are disrupting advisors. We don't compete in custody or manufacturing.
We take your existing investments and manage holistically at the household level with tax efficiency and to find the lowest-cost investment alternatives. The average customer already has four accounts at three different institutions, and we aren't asking you to open another account. We are asking you to say, 'Tell us about your 401(k) from a former employer you haven't looked at for months' rather than saying, 'Give us your new cash.'
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We know your assets are already everywhere—mutual funds you bought years ago and don't want to sell. We will bring our algorithm to where your money is today and look over all of it, and should you choose to hire us, we will make requisite adjustments where the assets are today.
As the cycle rate of people's jobs becomes faster, they can roll over into lower-cost and controllable IRA accounts. People may use a current employer plan to accumulate assets, but over time it's going to be IRAs that make up the bulk of your wealth, and that does need to be managed.
CNBC: One classic definition of disruption is going after the clients being ignored by the status quo. You are building your business around that, but do you ultimately go after the clients that the advisors and private banks covet?
Lu: Think of the history of the steel industry. The U.S. steel players didn't want to produce pig iron anymore, because it didn't make them any money. Advisors and private banks don't want to be dealing with people who have saved less than $500,000. Our clients are pig iron to traditional wealth managers. The pig-iron players weren't going head-to-head with U.S. steel until later. We can build a profitable business from the pig iron. The head-to-head battle with advisors and private banks is years down the road.
Our clients are 20 to 25 years younger than wealth manager and private bank clients. There is a big wealth transfer going on now. Money will move to people rather than people moving to money, and if they already have assets with us, they will pull assets into the digital experience rather than picking up the guy at Morgan Stanley.
CNBC: So what can't a computer do when it comes to finance advisory services? Can a computer get a CFP designation and do it all?
Lu: The travel industry is a common reference point. If I want an east-to-west around-the-world plane ticket, I'm still not buying that on Kayak. I'm still talking to someone, and that will be true for investment advisory. I expect we will keep talking to financial advisors, but rather than a generic one, we will talk to one uniquely versed in estate planning or currency exchange—whatever it is.
It's not that computers do something humans do; they do something humans never did and then translate it back to a human context. What that will be for mass-market investing is to be vertically integrated financial services, so it takes your money and manages it all. It is kind of ridiculous we ask American families today to bucket their money between IRAs, insurance and banking, etc. Those decisions should be computer-made. We no longer need the artificial distinctions.
CNBC: So who acquires FutureAdvisor ultimately, or who do you become?
Lu: No one acquires us. We become the next-generation financial advisor. You would have asked the same question to Charles Schwab in 1975. Schwab became Schwab.