"We are building services to help Americans with what often is their largest financial asset," says blooom CEO Chris Costello. "This trust doesn’t happen overnight."
"We are building services to help Americans with what often is their largest financial asset," says blooom CEO Chris Costello. "This trust doesn’t happen overnight."

Though industry opinion has largely hardened against the prospect of independent robo platforms toppling established firms, it bears paying attention in the coming year as to what inroads digital-first firms can make into the DC space.

Betterment's September announcement to enter the 401(k) market garnered widespread attention, but other startups were already focused on challenging traditional custodians with digital alternatives for managing employer plans.

One provider which has gained traction is Blooom, an RIA launched two years ago in the Kansas City suburb of Leawood. (The firm says it offers analysis based on a flower, hence the name.) Offering digital tools to manage accounts in employer-sponsored plans -- charging $1 a month for accounts under $20,000 and $15 a month for larger accounts -- Blooom says it has analyzed over 5,800 accounts to date, totaling nearly $500 million.

Blooom Co-founder and CEO Chris Costello spoke with Re: Invent|Wealth about the opportunity for startups like his in the 401(k) space, and what advisors should be considering in the continued digital evolution of the industry overall.

How can digital-first firms like Blooom shake-up the 401(k) market?

Before Blooom, I was working with clients with big portfolios which were all custodied at Charles Schwab. But many of them were still working and they had several hundred thousand -- or $500,000 -- in their 401(k)s with their employer, and it was a huge pain point to feel like I was adequately helping manage that account. What I really wanted was when that client left that job or retired, that money was rolled over to me at that point.

But here is the clunky process that I, and I am sure most of your readers go through -- we remind the client to bring in a paper copy of their 401(k) statement. When they come in for their annual review they slide it across the table for me to look at it and I either take a pen and scratch out how they should have it allocated, or follow up with an e-mail. But I had to then cross my fingers and hope that they would take my advice and go physically implement it themselves. That would mean picking up a phone and calling the custodian or going online. The truth of the matter is a lot of the times it didn’t get done. Part of that is a function of the very counterintuitive and confusing interfaces that they have to use.

What Blooom does is say, "Hey advisor, all you have to do is offer Blooom to your clients." We co-brand it with each advisory firm so it looks like it's coming from the advisor. They put it up on their website or e-mail their clients, however they want to execute it, and then Blooom does all of the allocation of the clients' 401(k) for them, the advisor gets all the credit for it, and we also build the advisors' dashboard. When the clients sign up for Blooom, they get a dashboard they can log on to see and track their future rollover business.

So, that is solving a pain point and advisors look at Blooom as non-threatening. We don’t compete with them. Schwab competes with them. Betterment Institutional -- I don’t see how that goes anywhere because they compete with advisors. They want those rollover assets. So our business model is going to be very attractive to advisors and we already see this.

For the larger firms, then, rolling out automated services is cannibalistic in nature?

I don’t know. I think it's too early to say. Schwab advisors, for instance, can use Schwab's robo offering to leverage their business with some of their younger clients or maybe from some of their smaller accounts. But at the end of the day, if I think back to the entire value add process between an advisor and a client, the portfolio management side of that rebalancing and tax loss harvesting is relatively a small piece of the puzzle and all of the other services and advice that go along with that are extremely important. That was something that we try to convey to their clients before this; yes I am managing your money but obviously there are these other services that I am still doing.

There are advisors still out there and their only value is to try and outperform the market. They have hung their shingle on, "Let me manage your money because we've figured out a way to predict the market, we have timed the market and we can pick the right stocks."

The Wealthfronts and the Betterments and the Schwab advisors are going to encroach on that market. But the advisors that are developing relationships with people and providing extra value add services; I think their business models are insulated against a lot of what the robo advisors are doing, but the jury is still out. A 22-year-old today that is uber-tied to transacting most of their life on a digital device, if you fast forward 20 years, just because they're 45 or 50 and at that point have a big portfolio, the jury is out to whether or not they are going to want a face-to-face advisor in 25 years. I think it's still a couple decades away before we'll know for certain.

Can digital tools make a mediocre advisor better?

I don’t know that I would phrase it that way. I would say -- from Blooom's perspective right now -- we are solving a pain point for advisors. We're helping them provide a more holistic investment advice on just a piece of their clients' portfolios. We're not helping advisors with how they manage their account custody, we're not helping advisors with the advice they're giving to their clients and the planning and tax advice of that nature; at this point Blooom is just fixing 401(k)s and it can be very helpful to advisors that struggle with giving value-added investment advice for their clients' held away 401(k)s.

From the perspective of the advisor then: can a digital toolkit really make you competitive?

I think the way that it can make advisors more competitive is that it can open up a new segment of the market that they haven’t been able to serve.

First of all, the average advisor age today is around 55. Generally speaking the average age of their client is usually five to 10 years older. The question should be asked more specifically, because the existing wealthy clients in advisor practices right now would never, ever, ever, ever use the robo advisor. Most of the wealthy clients that wealth advisors are chasing are 55 and older and value the face-to-face and the personal relationship. A lot of them get a little scared of transacting over the internet, and the real questions is, what happens going forward in the next 20 or 30 years?

This is because you have two separated segments. You have got people with money and most of them are older. So what happens when the 30-year-old today is 60 and has money, and the traditional wealth advisor would be competing for that client? Probably too early to tell, but I do think that there is a strong likelihood that this younger generation is not going to want to sit down in a traditional conference room with an advisor in a three-piece-suit and listen to being talked to in complicated terms. I think younger people are looking for different ways of engagement. I think advisors have to be thinking about the digital tools out there to bridge the gap between their clients that have wealth today and their future clients that might have wealth down the road.

I think that most advisors have to think about implementing some type of technology solution into their practices to help bridge that gap, so it should be a combination. It doesn’t need to be an either/or at this point.

Do you see yourself pivoting your business at some point?

We are laser focused on fixing the 401(k) space -- and when you hear me say 401(k) that also means 403(b)s too -- but the employer-sponsored retirement space is where we are laser focused, where we see the biggest opportunity. So many people went to work at a job and the job description said nothing about becoming your own money manager, but that's what people are being forced to do. As a result, we are having a massive problem of people under-saving and underperforming in their investments because they're getting no help.

It's hard to say what would happen further down the road, but Blooom wants to be known as the company that fixes your 401(k). When people talk about Blooom, we wanted to be associated with that. And right now this is an incredibly valuable tool, we think, to plug a little bit of a hole in advisors' practices and help them better service their client with those kinds of hard, clunky, held-away 401(k) accounts.

Has Blooom been approached at any point by an established firm looking to make an acquisition?

Yes. We are on people's radar screens and we have had some conversations, but it is still way too early for us. But, I can tell you in my 20 years I have never had more fun in my life.

It is probably the most meaningful work I have ever done, and not that I wasn’t adding value to wealthy clients before Blooom, but man, I may not be around to see the benefits of what Blooom does, but 20 or 30 years from now someone may be able to retire because of their involvement with Blooom. I could be retired and gone by then, but I know it's going to happen.

I know for a fact that the more people we can help through Blooom, it is so simple and easy to use, the more good we are going to do for these people. Obviously it's fun to think about building a valuable business, but when I think about what my two young daughters would be the most proud of me for what we are doing right now, and the people's lives that we are helping right now who never had help before.

The thought of stopping that if someone comes along to try and buy us out, I would be thinking I would have a big void in my life if I couldn’t work on this right now.

What has that discussion been like?

I have a philosophy that the large firms out there -- I call it the 3B concept -- there are a lot of big financial firms that either build it, buy it or buddy with it, so there are a lot of firms that realize that they could create something like this. I think innovation a lot of times is what creates the biggest opportunity and the firms that are interested are looking to buy or buddying with it.

The buddying for us is a problem because we are very entrepreneurial right now and we want to be able to make decisions at lightning speeds and go after opportunities quickly. Partnering with a large incumbent financial institution might slow some of that entrepreneurial speed. So, the conversations aren’t that long because at this point we know where we want to go.

Is it hard for advisors to be optimistic about digital disruption in the industry?

If I think back to my clients before Blooom, I don’t know that I would say that anyone of them at all would leave to go to a robo advisor, and so I don’t see that big of a threat for the advisors' business today.

The clients that most advisors want today, I don’t feel that the robo space, at large, is threatening that segment. What happens 20 years from now is an entirely different story. The people in this space today should not feel like they are at risk of going extinct here in the next few years. I think that it's important that you provide services to clients beyond just money management and executing transactions. Just ask Merrill Lynch in 1995 what happened to their business when E-Trade came on.

So there has to be more given to the clients today and most face-to-face advisors are perfectly equipped to do that. It may be a little bit of a wake-up call for them to add more value. And you can't charge 2% to underperform the market either. You can charge somebody a fee as long as you are providing a legitimate value. I used to tell clients all the time, "The fee you are paying me is a pay as you ago arrangement. At any point if you feel you aren’t getting the value from us worth multiples of what you are paying for us, you need to fire us."

Every advisor needs to make sure that what they are delivering is worth multiples of the fee they are charging. As long as they are doing that, there is no threat at this point. But we should have another conversation in the next 10 to 20 years.

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