FutureAdvisor Collects $5M to Expand 401(k) Advice Software

Seattle personal finance startup FutureAdvisor, a summer 2010 graduate of the Y Combinator startup accelerator program, has landed a new round of venture financing to add employees and continue expanding its 401(k) advice service.

Co-founders Bo Lu and Jon Xu, who run the startup out of a historic building in Seattle’s Pioneer Square, say that users now have connected retirement accounts worth a collective $4 billion to the FutureAdvisor software.

They wouldn’t reveal how many raw users that represents, but say that it’s a pretty consistent demographic that reflects a group of people not usually served very well by the mainstream financial services industry.

“It’s not like one rich guy walked up one day and gave us half of it,” Lu says. “The average person has between $50,000 and $150,000 in assets connected to the platform.”

FutureAdvisor uses software-based analysis to steer individual investors toward the best bets among 401(k) plans offered by their employer. It doesn’t manage money, but gives advice to individual investors about the best ways they can steer their own retirement accounts.

The startup’s algorithm prefers low-fee index funds, which track lists of stocks like the S&P 500 or the Russell 1000. FutureAdvisor cites research showing that most mutual funds can’t beat an index’s long-term performance.

The company grew out of a personal passion of Lu’s. As an active investor since the age of 16, he’d built a spreadsheet to help allocate money in the financial markets, but found that friends wouldn’t keep up with it after coming to him for advice.

Bo Lu

FutureAdvisor’s founders say the market is ripe for this Web-based software approach for two big reasons: Everyday people investing relatively small amounts for retirement typically aren’t going to get top-flight advice from financial advisors, but the intricate differences in investment funds can be hard to decipher for busy non-experts.

“This is an industry that needs fixing,” Lu says. “401(k)s right now are kind of worse than buying a car in the `80s.”

Jon Xu

FutureAdvisor is free to use today, since it’s still in the early phases of trying to make sure it has a large enough user base. The company plans on charging fees for its advice at some point in the future, but the startup still hasn’t settled on exactly how that fee system will look just yet.

That’s what the venture capital is for, of course. The Series A investment was led by Sequoia Capital, with other investors not disclosed. FutureAdvisor had previously raised a $1 million seed round from Y Combinator, Sequoia, Kapor Capital, and angels such as Square COO Keith Rabois and Yelp founder Jeremy Stoppelman.

FutureAdvisor can’t handle the entire universe of 401(k) options, but has been expanding since it launched publicly earlier this year. The startup does that by targeting relatively large companies, which allows it to bring on groups of potential users in large chunks.

So potential users have to go check out the site to see if their employer’s 401(k) options are in the system. But Lu says the company now supports plans that collectively serve some 11 million Americans.

To help attract more users, the startup is now offering free assessments of a 401(k) plan’s fee structures, to see which of the 401(k)s offered by a given investment manager are the most costly.

That can vary widely even within one company, with some good plans and others that are very expensive.

“Facebook, for example, has one of the worst plans we’ve ever seen,” Lu says.

And who does well? The Thrift Savings Plan offered to federal employees (including members of Congress) is “the best, bar none,” Lu says.

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