Do 401(k) plans need fixing?
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 defined contribution plan space.
Betterment's September announcement to enter the 401(k) market garnered widespread attention, but a number of 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.
Also see: “Everything you need to know about robo-advisers.”
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 (left) spoke about the opportunity for startups like his in the 401(k) space.
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 [went 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 email. 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 adviser, 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 adviser. They put it up on their website or email their clients, however they want to execute it, and then Blooom does all of the allocation of the clients’ 401(k) for them, the adviser gets all the credit for it, and we also build the advisers’ 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 advisers 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 advisers. They want those rollover assets. So our business model is going to be very attractive to advisers and we already see this.
For larger firms, is rolling out automated services cannibalistic in nature?
I don't know. I think it's too early to say. Schwab advisers, 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 adviser 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.
Also see: “15Five automates 401(k) plan.”
There are advisers 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.”
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 advisers' 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 advisers 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-adviser, and so I don't see that big of a threat for the advisers’ business today.
The clients that most advisers 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.
Also see: “Betterment enters 401(k) space.”
So there has to be more given to the clients today and most face-to-face advisers 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. As long as they are doing that, there is no threat at this point.
Suleman Din writes for Money Management Executive, a SourceMedia publication.
[Photo credit: Robert Houser]