Personal finance digression: my beef with Future Advisor

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This isn't a personal finance blog, or a financial independence blog, or an early retirement blog. But I understand there's a lot of overlap in interest between those subjects and travel hacking, so every once in a while I let myself vent about the personal finance industry (see: "Pound Foolish" is a pretty good book").

I was complaining on Twitter about Future Advisor the other day and got into a back-and-forth with their social media team. I want to expand on my point and explain why Future Advisor does not and cannot do what they claim to do: "actively monitor and manage our clients' IRA, Roth, and taxable accounts from a household-wide, long-term perspective."

How Future Advisor works

When you create a Future Advisor account, you're asked for just three pieces of information: your current age, your target retirement age, and your risk tolerance ("Conservative," "Moderate," or "Aggressive"). Based on that information, Future Advisor creates a "Target Portfolio" and a recommended asset allocation. Here's their recommended asset allocation for me:

Next, Future Advisor asks for your current "financial profile." You can either manually input your current investments, or enter your login information and Future Advisor will download the details of your investments automatically. Here's my current financial profile:

Once you've completed those two steps, Future Advisor gives you an "Action Plan," telling you what to do with your current assets in order to bring your plan in line with the asset allocation they recommended based on your age, target retirement date, and risk tolerance. Here's the action plan for my Vanguard Roth IRA account:

Future Advisor does not consider interest earned on cash savings

Note in the current asset allocation picture I showed above, Future Advisor only allows you to add "cash you would like to invest."

The cash I have in my Mango savings account is not "cash I would like to invest," however. It is cash I already have invested — in a 5.28% (after $36 in annual fees) APR savings account! There's no way to tell that to Future Advisor. On the contrary, if I input the value of my Mango savings account, I'm told to move it all into investments that mirror the original target asset allocation Future Advisor proposed:

The explanation for this recommendation leaves me (almost) speechless:

Future Advisor is projecting an average growth of 5% in my cash — cash I'm holding in a savings account that already earns more than that!

This means Future Advisor cannot do what it claims to do

While looking at your target asset allocation, you can see an explanation of each proposed investment. Here's the important part for my point:

The "green" portion of my recommended asset allocation (15% of the total in the first picture) is intended to "reduce overall risk" and "offer growth in bear markets." If I have $5,000 invested in an FDIC-insured savings account with a high, fixed interest rate, and the goal is to reduce overall risk and offer growth in bear markets, logically I shouldn't invest any money in "Investment Grade Bonds," "Inflation Protected Bonds," or "International Bonds" until the total size of my portfolio is over $33,333 (15% of which would be the $5,000 balance in my high-yield savings account).

By ignoring the interest rate on my cash savings, Future Advisor gives inappropriate advice given its own stated investment objectives when designing a target portfolio.

What I'm saying (and what I'm not saying)

Let me be perfectly clear before this becomes a discussion of ideal asset allocations: I am not saying that the target asset allocation designed by Future Advisor is a "bad" asset allocation.

I'm also not saying that my current asset allocation is a "good" asset allocation. Indeed, the same criticism of Future Advisor could be applied to the target retirement date mutual fund my Roth IRA is invested in: since that target retirement date fund also has a bond component (10.1%), I would logically be better served by replicating the stock holdings of the target retirement date fund, while using my high-yield savings account to replicate the bond component with higher yield and lower risk.

I'm not going to do that, but it's a legitimate suggestion.

What I am saying is that Future Advisor, which claims to provide exactly that kind of advice, is incapable of providing it since it doesn't ask what the current yield is on your FDIC-insured savings accounts. Without having that information, it provides bad advice by its own standard of optimizing your holdings across all "IRA, Roth, and taxable accounts from a household-wide, long-term perspective."

In fairness, Future Advisor's social media team doesn't even dispute this.

The only remaining question, then, is why they are still in business?