The Cyborg Cometh

Here’s a first look at the profession’s first online (“robo”) financial planning engine—and what may be a better planning mousetrap.

By now, the profession has come to terms with the idea of automated online investment advice, aka “robo” investing, where people can input their preferences and get assigned a model portfolio of ETFs that will be managed on their behalf.  No threat, my friends, because professionals like us can move the locus of our value proposition from asset management to face-to-face personal financial planning, and do THAT far better than a machine.

But what if there emerged an online platform that offered investment management, automated (zero physical paperwork) sign-ons, plus online automated (“robo?”) financial planning at a depth that the profession has never seen before? 

What if this service was coupled with advisors located around the country who could provide face-to-face advice as needed?  Would THAT be a threat to the profession?  Or would it represent the cyborg planning firm of the future?

These are the questions that are running through my mind as I talk with former Brookings Institution consultant Matt Fellowes, the founder and CEO of a new company called United Income, based in Washington, D.C.  The firm counts among its seed investors the Omidyar Network, founded by eBay founder Pierre Omidyar.  A larger stake is owned by the Morningstar organization, and indeed Fellowes also happens to be, in his spare time, Morningstar’s chief information officer.  His background includes the founding of HelloWallet, a financial wellness platform for company employees that he sold to Morningstar in 2014 for a reported $52 million.

“I honestly can’t tell you whether United Income is a competitive threat to financial planners, or an exit strategy for them, or just a better mousetrap,” Fellowes admits.  “I think there’s lots of opportunity out there for independent advisors and also for what we’re trying to do.”

What, exactly, IS Fellowes trying to do?  “We feel like we’re taking a broader approach to wealth management, what we call the Efficient Investing Approach, which is effectively what good financial planners are doing today,” Fellowes explains.  “The really big difference is that we’re using technology and data in a new way, so that we can do it in a little bit more of a rigorous manner than is possible with the human mind.”

Modeling future expenses

The Efficient Investing Approach is actually a lot more than just investing; it’s managing and modeling the financial variables of a person’s life (including, but not exclusively, the portfolio) more effectively.  The methodology is explained in some detail in a 25 page white paper published by Fellowes and associates Lara Langdon, Lincoln Plews and Davey Quinn, which can be downloaded from the United Income website if you provide your name and email address.  The paper addresses what might be described as the inverse of ‘advisor alpha’—that is, instead of assessing the return value that can be provided by a financial planner’s astute asset allocation, asset location, tax management and rebalancing, the paper estimates the performance drag that would be incurred by an investor as a result of naive planning and modeling of things like asset cost, allocation, future spending patterns over time, social security claiming, and client lifespan.

The conclusion: if those assumptions could somehow be optimized for a retiree, the average person would be able to enjoy the equivalent of 124% more wealth during the full retirement period.

“Efficient Investing is really just wringing out all the ways that individuals are unnecessarily losing money in their wealth management approach,” says Fellowes.  “One obvious form is if they’re managing their money in a way that is tax-inefficient.  Or using risk management approaches in the portfolio that are not looking at how a person’s risk preferences might vary by different types of future spending liabilities.”

As you may have gathered, the portfolio management piece of Efficient Investing is not unlike the old “bucket” investment process, where different portions of a client portfolio are specifically allocated to different future spending needs.  But there are some differences.  The first is that the future spending needs are modeled more precisely than anything our profession has yet experienced. 

“The thing that used to drive me bananas when I used to study this stuff,” says Fellowes, “is: the two most important questions investors and planners need to answer is: when am I likely to die?  And: How much am I likely to spend before I die?  But those are probably the two least-studied questions in this space that we’re in,” Fellowes continues.  “The inputs are usually based on off-the-shelf assumptions.” 

The reader can quickly think of examples: Clients will spend 85% of their pre-retirement income in retirement.  Retirement expenses will rise smoothly each year tracking the inflation rate.  Clients will die at age 90 or 100.  Often there is no current portfolio allocation to future healthcare costs.

Instead of relying on hoary rules of thumb, the United Income planning engine asks clients to input how much they’re spending currently in three broad categories: essentials (like food and shelter), lifestyle spending (like taking vacation trips, eating at restaurants, etc.) and, of course, healthcare.  They’re also invited to add in expensive future goals like bequests that the clients want to leave their heirs, paying for a grandchild’s college education, or future purchases of a boat or a second home.

But do clients actually KNOW how much they’re spending today, enough to give accurate numbers to plug into the models?  Do they know how much that boat will cost in the future?  “We’ve found that by walking through it with them, and explaining it to them, we tend to get good estimates,” says Davey Quinn, United Income’s vice president of investments.  “The truth,” he adds, “is we’ve tended to get higher numbers than what they’re actually spending, which creates a conservative buffer.”

Expense trajectories

Once the spending estimates have been collected, the data is fed into algorithms developed with the help of Erica Groshen, the former Commissioner of the Bureau of Labor Statistics.  The calculation engine compares each client situation with public databases on aggregate expense trajectories in the U.S., given the clients’ gender, health profile, educational attainment, where they’re living, their household size and historical spending patterns for a similar population cohort.  The spending metrics for pre-retirees are based on the Bureau of Labor Statistics Consumer Expenditure data.  United Income estimates its clients’ more complex post-retirement spending using numbers from the Health and Retirement Study and the Consumer Activity Monitoring Survey (CAMS), collected by the University of Michigan and the RAND Corporation.  “CAMS is really interesting,” says Quinn. “They took one cohort of people and tracked their spending over time as they age.”

United Income’s regression model compares each client with the datasets, and then it estimates how much the clients will spend in each segment, each year, going out into the future.  “We’re not suggesting that we can predict exactly what you’re going to spend,” Quinn admits.  “But we can get a baseline to help build out what your appropriate asset/liability mapping might look like.  We’ve found this to be more accurate than using the 4% rule or 80% of preretirement income.”

More accurate, how?

“One thing we’ve learned is that spending is not constant over time,” Quinn explains.  For instance, he says, the spending data can be thrown off if the client is still making payments on a home mortgage.  When the mortgage is paid off, the spending in the essentials category (food and shelter) takes a sudden drop. 

Outside of that, spending on essentials tends to be consistent on a year-to-year basis from the retirement starting line to the grave.  Not so lifestyle spending, which usually spikes in the early years of retirement and degrades over time.

The CAMS survey also collects data on the health of the participants, which led United Income to start modeling each client’s future healthcare expenditures.  “We adapted their questions, like whether you smoke, do you have diabetes, how much you drink and so forth,” says Quinn, “and we compare the responses to the CAMS data on how much people were spending on healthcare.”

This health data is also applied to actuarial tables, to improve on those rule-of-thumb estimates of client longevity.  “The goal is to create personalized longevity estimates for both the client and whoever else in the household is reliant on these future investment outcomes,” says Fellowes.  That, of course, determines how long the portfolio will have to support the family, and informs the sustainability of the distribution plan.

Customized allocations

Finally, the Efficient Investing Approach assigns each bucket its own unique asset allocation, in order to more closely map its growth to the future liability it is intended to pay for.  The actual allocation is determined by client preferences. 

“You don’t want to take much risk for your future essential spending needs,” Fellowes explains, “so we automatically match the future essentials expenses with your annuity income or a pension plus your Social Security checks.”  If the portfolio has to cover some additional portion of those future essential expenditures, clients will be asked how much risk they want to take.  Not surprisingly, most tend to opt to put this part of the overall portfolio in a low-volatility mix designed to just keep pace with inflation.

For the future lifestyle and healthcare buckets, clients are asked the same risk tolerance question—what risk would you be willing to take with that portion of your future spending goals, on a scale of 1-10, where “10” would map to 100% equity? 

“We’ve found that when you break the expenditures down into different components, it’s easier for people to understand and assign a risk score,” says Quinn.  “When you’re talking about their travel goals, the ‘going out to eat’ goals, people intuitively understand, okay, I don’t necessarily NEED those things.  So I can be a little risker there than I can with the essentials.  The same with healthcare.  I don’t have much of a healthcare spending need now, but I may in 20 years and that cost will rise faster than inflation.

In fact, Quinn believes that many planning clients may be invested more conservatively than necessary, since the traditional risk tolerance questions are related to their overall comfort level with aggregate portfolio volatility, rather than specifically related to the risk that the assets that will need to be paying for future expenses will or will not fall short.  Separating the essentials bucket from the other future expenditures, and having most of the future essential expenses covered by pensions and Social Security, will lead clients to embrace higher-risk portfolios overall, knowing that no matter what happens on Wall Street, they’re in little real danger of having to subsist on cat food under a cardboard box in a vacant lot.

Model transitions

United Income’s model portfolios are composed of ETFs, whose expense ratios, all-in, come to less than 20 basis points a year.  The Efficient Investment Approach white paper spends a lot of time talking about the inefficiencies created by high portfolio-related expenses, and the company’s investment management walks the talk.

What if clients have existing investments—as they always do?  Uniquely, among the online investment platforms, United Income can accommodate outside assets, either temporarily or permanently.  “We have an algorithm for their taxable investments, where we can gradually transition the clients out of those positions into our models,” says Fellowes.  “If clients have an emotional affinity toward one or more of their investment positions, we’ll be able to accommodate that as well, to the extent that we think it’s responsible.”

Social Security modeling

A third planning inefficiency described in the United Income white paper is the average investor’s inability to navigate a variety of complex public policy issues and opportunities—notably including inefficient Social Security Planning.  Fellowes thinks that there is considerable room for improvement in this area in the planning profession.  “The Social Security advice that I’ve seen out there is largely geared toward maximizing your Social Security benefit, rather than optimizing your Social Security benefit,” he says. 

The difference is between telling clients that it’s better to wait until age 70 before claiming Social Security income benefits, and telling clients how to use various claim and suspend strategies to receive benefits today and then switch to higher benefits in the future.  To design its Social Security modeling algorithms, United Income hired Howard Iams, the newly-retired economist who built the benefit estimate engine at the Social Security Administration. 

“He’s come over to our team and duplicated what he did there,” says Fellowes.  “At this point, we have about 80% of the Social Security handbook digitized, which allows us to simulate hundreds of different claiming strategies and the expected wealth outcomes alongside all the different investment alternatives that you have for each of them.  That,” he adds, “allows us to get to a much more optimal Social Security claiming strategy for the household than has been technically possible in the past.”

The company also plans to model future tax policy, working with former Deputy Assistant Secretary for Tax Analysis (currently a senior fellow at Brookings) to create forecasting algorithms that will help drive decisions on things like asset location and Roth conversions.  “We’re just scratching the surface of the tax code,” Fellowes admits.  “We’ve done more than anyone I’ve seen out there, but we’ve got a long way to go.”

Improving resilience

The fourth area of consumer financial inefficiency, as outlined in the United Income white paper, is around modeling potential disruptive financial events in the future.  “Using Monte Carlo to simulate future market outcomes tends to ignore the more impactful LIFE outcomes, and how someone’s financial circumstances can change dramatically in the future,” says Fellowes.  “Those life events turn out to be a lot more consequential to wealth outcomes than market events.”

Most planners are familiar with these shocks to the plan: a cancer diagnosis, someone laid off and forced to retire three years earlier than anticipated, a grandchild that needs support for education—all of which can force all parties to throw the original financial plan out the window. 

“There are any number of these life outcomes that can be just as impactful to a client’s financial situation as those rare black swan events that so seldom happen in the markets,” says Fellowes.  “Everybody is concerned that the Monte Carlo simulations don’t account for black swan market outcomes,” he adds.  “But they are disregarding the fact that even more impactful ‘black swan-like’ events happen every single day in this country, for different households, based on their changes of life.  We felt, from a wealth management perspective, that it is important to get a handle on those life outcomes, and the probability of them occurring in the future.”

United Income uses Monte Carlo analysis to model potential high and low-return investment scenarios.  But how does the system model for these life-changing events?  Simply by adding more ‘life event’ variables to the Monte Carlo model.  Fellowes is working with an undisclosed tech company that is applying population statistics to model a lot of unplanned life event shocks into the Monte Carlo analyses of client future expenditures, which allows the company to evaluate—and, potentially, improve—the resilience of each client’s financial circumstances.  “Their technology allows us to simulate, for each individual, not the hundreds of outcomes that Financial Engines and Morningstar and others do, but millions of potential outcomes based on a lot of non-investment-related shock scenarios,” says Fellowes.  “And so, at the end of the day, what we’re recommending to an individual is a plan that survives in the most number of future life and future market outcomes.”

Planning deliverables

That’s the up-front planning process, which (as you’ll see in a minute) clients can do online or face-to-face with a United Income planner.   The plan output, delivered online, delivers a recommended household investment allocation that takes into account held-away portfolios, and some or all of the money can be automatically invested with United Income.  The planning engine also produces a recommended Social Security claiming strategy and dates for each client partner, and a personalized longevity estimate for both partners.

Clients get a personalized spending forecast for their lifestyle, health and essentials expenditures, a monthly and annual budget for the rest of their lives, and a monthly tax-optimized withdrawal plan that solves for a “retirement paycheck” that will automatically be delivered monthly.

Finally, the plan estimates the probability of success across millions of possible market and life outcomes, estimates the lifetime wealth that the plan is expected to create from tax savings, fee savings, retirement benefit increases and investment returns, and gives an ongoing summary of total wealth.  For people over age 70 1/2, there is an estimate of the required minimum distribution from all accounts (whether managed by United Income or not).

“Members can get a financial plan with or without a financial planner,” says Fellowes.  “The software is designed to be used with an advisor, or without, depending on the comfort level of the client,” he adds.  “But we find that all of our clients will eventually want to talk to an advisor, either in person or over the phone.”

Like the investment robos, United Income has an automated account transfer protocol, and like Betterment and Wealthfront, this is implemented with Apex Clearing as the back office.  “Apex has worked with us to build a digital “signature” tool that allows a member to “sign” the transfer documents by checking a box on a web page,” says Fellowes.  “There is no need to download a Docusign plugin and figure out the signature process.  The member checks a box, pushes a button, and the account transfer process begins.  Our members are able to avoid all physical paperwork. They receive customized, United Income-branded account statements digitally.  We have the tools and access to raw data that allows us to build our own reporting suite for our members.”

Tiered service

United Income does not plan to offer its algorithms, models, auto enrollment system or planning software to the planning community on a white label basis.  Instead, the company plans to work with clients either directly—as the profession’s first robo-planning system, or, if clients prefer, face-to-face with a growing network of planning professionals hired by the company.  “How much human and how much robo is in the mix should be determined by a variety of things,” says Fellowes; “among them how much customization somebody needs, how much money they have, and of course how complicated they are.  We talk to people in person, on the phone or video conferencing, depending on where they’re comfortable.”

The pricing is tiered.   The most robo-esque offering costs 50 basis points a year for accounts with at least $10,000; clients input their estimated expense data and risk preferences for the different buckets, and get all the planning, recommended portfolios and, if they’re retired, the monthly checks. 

Or clients can get the online planning system plus an annual check-in with a human advisor for a $600 minimum yearly fee, or 60 basis points on the portfolio, whichever is larger.

For 80 basis points on the portfolio (dropping to 65 on assets over $1 million), or a $2,400 minimum fee, clients can get a dedicated human financial advisor to help them gather and input their expense information, get help with Social Security and Medicare applications, plus concierge advice on things like travel opportunities and finding care options for aging parents.

“The bulk of our members, 76% currently, are in the full-service model,” says Fellowes.  “What’s interesting about the concierge service,” he adds, “is that we’re discovering that a lot of recent retirees struggle to figure out what to do with their time.  So we find ourselves taking on the role of lifestyle coach, connecting people with local educational opportunities, helping them enter second or third careers, identifying volunteer and entertainment opportunities.”  The company planners are trained using a manual created with the help of the AARP and the Stanford Center on Longevity, where Fellowes has served as a board member.

Succession opportunity

United Income may also be a succession opportunity for established advisors.  The firm is selectively purchasing established practices and hiring the founders as part of the offering.  The arrangement offers smaller firm owners a chance to get a back office that will handle the compliance, bookkeeping, billing, reporting—and marketing.  “We’re not really interested in the rollup concept,” says Fellowes.  “We’re MUCH more interested in people who have built up their client list, and are really nurturing those relationships and trying to find added value.”

United Income has also hired some younger planners who are willing to take over the clients of planners who are selling in anticipation of retirement.  For the acquisitions, the sweet spot is between $50 million and $200 million, although the initial acquisitions so far have included firms larger and smaller than that size band.

One of the value-added pieces that the firm is looking for is thought leadership that can be added to the United Income value proposition.

For example?  “I was meeting with a gentleman yesterday who is a real intellectual, and he’s really interested in commodities, and has done quite a bit of research, written some books, and is interested in being part of the investment team to think about how commodities fit into the overall approach,” says Fellowes.  “There’s another individual who is really focused on financial planning and building out more functionality that will handle more use cases in the software.  We try to figure out what you’re interested in and see if there’s a role for you to play here.”

One advisor who has sold his firm to United Income is Bob Bolen, founder of the Touchstone Pathway client questionnaire technology that was profiled in this publication (February 2018 issue), whose Envision Wealth Planning firm is now a branch office of United Income.  “They found me through my listing on Succession Link,” says Bolen, “but I was there as a buyer of firms, not a seller.  They called me and said, we’re interested in talking with people.  Would you have an interest?

At the time, Bolen was in the process of negotiating a merger with a local firm whose owner he has known for the past 10 years.  He had a brief conversation with Ben Meirowitz, United Income’s Vice President of Member Success, mutually trying to decide whether there was a fit.  “They told me what they were about, I told them what I am about, I went to see them, got an offer that I thought was pretty good,” says Bolen, “and then the next day I called them up and turned them down.”

Why?  “I said it was too much of a robo arrangement,” he explains.  “I didn’t think it was really financial planning, which is what I want for my clients.”

Bolen received a followup phone call, this time not to negotiate, but to find out more about Bolen’s definition of financial planning, which was apparently something the firm hadn’t considered in its fancy algorithms by Washington economists.  “He said, I want to hear more about life-centered financial planning, and what that means to you,” says Bolen.  “We talked about using your money to support your life, not the other way around, and the tools I’ve been using to get at what’s really important in a client’s life.  I shared with them Ted Klontz’s reflective listening techniques and Kinder’s three questions, and they were like, ‘Wow!  That’s really good!  Do you think you could mentor other advisors on how to do that?

During several followup conversations, Bolen decided that the United Income approach, though subject to improvement, actually WAS financial planning.  He negotiated a sale where he received an up-front payment, deferred payments and stock (the actual deal structure and amounts are confidential), and also a commitment that he will stay on for two years and teach other United Income advisors how to conduct life-centered initial client interviews.  “The consulting part of it, the chance to make a difference in how they were working with clients, was intriguing to me,” says Bolen.

In addition, the agreement stipulates that Bolen’s Nashville location will become a branch office of United Income, which will serve the surrounding area and continue to offer face-to-face contact with Envision Wealth Planning’s clients as they transfer to the new firm.

How is the transition going?  “I was using MoneyGuidePro,” says Bolen.  “But United Income’s planning software is easier to grasp, and the clients like the interface.  I’m telling them, you can add a goal, you can add a resource, or an income stream or an asset, but you don’t have to do these things online if you prefer to use me or the other representatives of United Income.”

The bottom line, he says, is that the firm seems to have a genuine desire to help and serve clients, including his.  For Bolen, that was an issue more important than the actual dollars and cents.  Plus, he says, the firm agreed to provide consulting time for him to make improvements in Touchstone Pathway. 

“I would say they were extremely flexible in how they wanted to help me while I was helping them,” Bolen concludes.  “It’s only been four months into the transition,” he adds, “but so far, so good.”

End game?

Despite the fancy technology and what may be the world’s first robo-financial planning offer, United Income currently has just 7 planning professionals on staff.  Total assets are under $500 million, after seven months in business.  So naturally I asked: what is the end game here?  If all of your plans come to fruition, what will this company look like in 10 years?

Fellowes thinks this is the wrong question, because it focuses on the growth of assets rather than the improvement in the quality of advice and service.  “We are really focused on growing our long-term value proposition for the client,” he says, “which is: we would like to become a holistic wealth management solution.  And that means, today, that we provide investment management, financial planning, some day-to-day money management, some tax management.  As we go forward, we’d like to provide more and more of these services.

“The intent,” he adds, “was to build something very new and different, that has the capacity to scale to a global solution.  With this Washington, D.C. policy network, I know a lot of people who are involved in research and public policy.  With the blessing of Morningstar, we have a nice combination of resources that we’re bringing to bear on a very tough set of problems that any financial planner would be familiar with.”

I started this article with a series of questions that came to mind as I was talking with Fellowes and Quinn, but of course the company’s model raises other questions as well.  My guess is that some readers have been asking, as they read the profile: “How new and different is all this, really?”

On the surface, it’s hard not to feel a certain respect for a startup that includes among its consultants, in addition to Iams and Groshen, the former chief investment officer of non-traditional strategies at SEI, Inc. (James Smigiel); a former deputy chief of staff for the U.S. Centers for Medicare and Medicaid Services (Tim Gronninger); a former U.S. Senator (Peter Fitzgerald); a former senior advisor at the U.S. Treasury Department (Mark Iwry); A former director of policy research at the Social Security Administration (Kevin Whitman); a former chief revenue officer at AOL, Inc. (Ned Brody); the head of the Vanguard Center for Investor Research (Steve Utkus); and the former president and CEO of AARP Services (John Wider).  But there’s really nothing new about inexpensive index (ETF) investing or model portfolios, and one has to assume that eventually TD Ameritrade, Schwab, Pershing, Fidelity and Shareholders Service Group will incorporate the onboarding conveniences that Apex Technology has provided the various online asset management (“robo”) firms, and finally (we’re all becoming impatient) make them available to the rest of the profession.

Matching current assets to future liabilities is commonplace in the pension field, and the bucket approach to assigning which parts of a portfolio go to which future expenses is not a totally new idea either, though not commonplace in the profession.  Many planners (though certainly not all) are giving great Social Security claiming advice.  And it’s fair to ask whether modeling future retirement expenditures based on survey data is more useful than just knowing that retirees tend to spend more in their earlier years and that you need to have a reserve for those inevitable unexpected financial black swans. 

Even the online planning is not really new.  Both MoneyGuidePro and eMoney allow clients to model their financial situations online, and both seem to see those capabilities as their greatest avenue for upgrades and improvements.

My sense is that United Income is going to nudge the profession forward on a path it’s already on.  Forty years ago, the planning service was 100% human-provided, 0% from a computer (unless you count the HP 12-C). 

Thirty years ago, with the advent of increasingly sophisticated software, we began to see a cyborg model emerge, where the service was 80% human, 20% software. 

Today, new planning, CRM, rebalancing and tax-loss harvesting tools are driving us toward 70/30.  In the future, all the new platforms that let you outsource the whole investment management process (except, of course, for the hand-holding) may be nudging that mix a little further, toward 60/40, particularly with younger clients and less complicated cases.

United Income’s online planning capabilities have lured at least a few clients seem to a radical 0/100 advisor-to-computer mix, while still delivering the modeling we associate with financial planning.  Most of the others are certainly below that 60/40 norm, which seems to me to be a clear premonition of the future.

Meanwhile, United Income is showing where the time savings from this increasing robo-izing can be “reinvested:” in a variety of real-life concierge services that many clients might appreciate more than hard-to-evaluate things like financial advice.

If the company really gets off the ground—and I think it will–then United Income’s competitive offer to consumers could move an increasing number of planning firms away from those rule-of-thumb assumptions about retirement expenditures, longevity and portfolio sustainability.  It may move us toward allowing clients to do more of their plan modeling online.  Some planning firms may feel compelled to finally do the research and raise the sophistication of their Social Security-related advice.  The concierge services that United Income currently offers may eventually become a mainstream part of the planning service menu.

I can even envision some client portfolios becoming more aggressively allocated.  The bucket approach is a great way to help clients understand the complicated idea of matching today’s assets to future liabilities.  At the least, many advisors might want to take a second look at their retirement models, and see if they’d make any changes once they match Social Security, annuity and retirement plan income with future basic necessity expenditures. 

Will we start to apply FinaMetrica risk tolerance assessments to specific segments of client portfolios?  Will the profession use the bucket approach as a way to mainstream the pension industry’s asset-matching concepts?

I think United Income is proposing a better mousetrap, and I expect the profession to respond. Over time, there will be a new assessment of how to most efficiently provide financial planning services and how to do a more sophisticated job of modeling, explaining and serving.  There is no reason not to borrow freely from the insights that Fellowes and his team have brought to our profession.