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The wave of robo-advisors (e.g., Betterment, WealthFront, Personal Capital) have one thing in common–they can’t manage your 401(k) investments. Today I have the opportunity to interview Chris Costello, the co-founder of Blooom.

For $15 a month, Blooom will automate the process of selecting an asset allocation and rebalancing your 401(k) investments. It works with just about any 401(k) account, regardless of which company administers the account.
Related: Blooom Review

If you listen to the audit of this interview, I must apologize about the sound quality. I had changed the technology that I used to record podcasts, and clearly did not get the settings correct. I’ve since fixed the problem, but could do little to improve the sound quality of this interview.

The good news is that you can read the transcript below if you prefer.

Transcript of Interview with Chris Costello of Blooom

Rob: Chris, welcome to the show.

Chris Costello: Thanks a lot. I appreciate getting the chance to talk to you today.

Rob: Well, I’m glad you’ve taken some time out of your busy day. I’m very interested in what you guys are doing at Blooom, partly because it helps folks with 401ks and a lot of the automated investment services don’t do that. But, before we get into Blooom, so that folks know who you are, why don’t you tell us a little bit about yourself?

Chris Costello: Absolutely. I’ve been in the investment advisory business for about 20 years. Up until a few years ago my entire career was spent working with folks that had accumulated (for the most part) significant wealth, already. I would say most of them were within spitting distance of their retirement ‘finish line.’

About 10 years ago myself and one of the other cofounders Kevin Conard broke away from some of the big Wall Street wire-house firms and started our own independent registered investment advisory firm and grew that firm to over half a billion dollars of assets under management. Again, it was all from people that have already kind of accumulated and arrived at a wealthy state. Most of them were either real close to retirement or already in retirement. We carved out a nice niche in terms of being very good at helping people prepare for, and making the transition into retirement.

Through my entire time in this business I’ve always been keenly aware of the fact that if you don’t have a bunch of commas in your account balance (or at least 7 figures) a lot of times you don’t have access to some of the best high-quality advisors out there. And that’s simply because it’s a service business and a lot of the more better qualified advisors will start to have larger and larger account minimums. Younger people, or those without a gazillion dollars often times don’t have access to people in this industry so that was a big reason behind the desire and recognition of the opportunity to start and launch Blooom.

Rob: As folks listen to this show know, I took the Series 65.

Chris Costello: Yes.

Rob: I’m a lawyer and I’ve thought about going into this business. I haven’t yet. But, how exactly do you build a half billion dollar business? How do you get that much assets under management?

Chris Costello: I think you have to start by treating people the right way and delivering something of value. We’ve been fortunate in that. We’ve built up this business almost entirely off of referrals from our existing clients which is, obviously, the highest compliment. I mean, if the client is willing to refer their really good friends or family members, then we must be doing something right. If I had to put a statistic on it, that’s where most of our clients come from.

But, back in 2004 when we left— at the time it was called Wachovia. It was later bought and rebranded into Wells Fargo. But when we resigned from Wachovia in 2004, we had about 100 clients that trusted us and followed us to be our original clients for this other firm called, The Retirement Planning Group. As a matter of fact, we recognized those client at our 10 year anniversary earlier this year by calling them, “the bravest people in room.” Because 10 years ago they gave a couple of 30-year-old young guys a shot and trusted us with their nest eggs. So we had taken those 100 clients, and at that time were managing about $25 million and, like I said, just through hard work and treating people right and providing a good service, we’ve grown it. We’ve added some advisors along the way and now we manage about $525 million. Again, also individual clients. No corporations or institutions.

Rob: Right, right. Okay. Before we get into the details of Blooom, one last question. Where do you fall in the old debate between passive investing and actively managed funds?

Chris Costello: Very, very far on the passively managed camp. I’d rather enjoy and love to (at some point) debate in a public forum, somebody on the active management side. If I could—

Rob: I’ll see if I can find someone—

Chris Costello: There is empirical evidence that shows that index investing is a better way to do it . But ironically, as passive investors we actually count on the active investors. Those guys help make markets more efficient and liquid so we need them, actually, in a strange kind of symbiotic relationship.

Rob: That’s right. Passive investing wouldn’t work if there weren’t the active folks out there.

Chris Costello: [Laughter]. That’s right and we wouldn’t have anyone to make fun of either.

Rob: [Laughter]. That’s true too. Alright. So tell us about Blooom. And why in the world, with half a billion under management, would you even bother creating another business?

Chris Costello: Of all the interviews that I’ve done and chances that I’ve had to talk about Blooom, that may be one of the better questions. I think, more than anything, throughout the last 19 years, either at the forefront or back part of my mind— and Kevin would say the same thing, we’ve been aware that people our age, our peers, our friends, didn’t have access to quality financial advisors. And what did happen a lot of times is that my friends, peers or whatever would find out what I did. They’d find out that I was a financial advisor and they’d say something like this, “Chris, I’ve got this 40k-1 thing…”

Rob: [Laughter].

Chris Costello: “… Through my employer and I’m putting money into it every month but I have no clue how I’m supposed to be investing or managing the thing. Would you mind taking a look at it and tell me what the heck I’m supposed to do?” I would say, “Yes. Certainly. Send me a copy of your statement and I’d be happy to take a look at it email you back with some instructions on how to allocate that.” And I’ll tell you, Rob, nine out of ten times I’d get a copy of their statement and their allocation was significantly ‘screwed up’ for lack of a more scientific term. Screwed up from a standpoint… Not like one financial advisor would say, “Yeah, that’s fine,” and somebody else would say, “No, it’s not.” Anybody in this industry would look at that and say, “No, a 29-year-old should not have 100 percent of their 401k in stable value or money-market fund.”

Rob: Right.

Chris Costello: And I saw that over and over and over again. Or I saw a 33-year-old with 100 percent of their 401k in a target date fund that wasn’t even remotely close to the retirement date. And sometimes you’d see several different target date funds used inside one 401k allocation. At the time, prior to Blooom, I’d just scratch out a quick allocation. I’ve always had a bias towards index funds so I’d try to build out the allocation as much as possible using index funds if the plan had them included as a fund option. Then I’d just email those instructions back to my friend or whomever I was helping and hope and trust that they would then get online, log into their 401k provider and make those changes.

Unfortunately, what happened more times than you would think, it didn’t get done. You know, the email sat in their inbox and they’d sheepishly admit to me next time they saw me, that they appreciated the allocation instructions but were embarrassed to admit they hadn’t made the changes yet. Kevin and I were talking one night a couple of years ago and thinking about how to grow and expand our relationship to our clients’ kids. At the time, the angle (or genesis) of the idea was more about— we’ve got these wonderful clients, most of which are baby-boomers. How do we help the next generation? How do we start to form relationships with them? So we started thinking about this 401k service. Most young people may not have other accounts but they likely will have 401ks. That, coupled with the fact that people were being left out of the advice picture and were messing up their 401ks— the combination of those three things really lead to us creating a tool to fix 401ks.

In early 2013, as any good startup should do, you do your homework. We looked at our competition. We looked around at all of the big names that were in this robo-space and nobody was really doing it for the participant. There was a lot of advice being given. There were a lot of good tools for giving you advice but nobody was really out there actually doing it for people. Now, Financial Engines has an offering where, for a certain fee, they will do some of it for you. But that’s a different business model because Financial Engines— in order to access Financial Engines, you have to work for a company that is engaged with them.

Rob: Right.

Chris Costello: We wanted to build a solution that was employer and 401k custodian agnostic that anybody could use. And it wasn’t just advice. I use this analogy from time to time; think of Blooom as the dietician that doesn’t just tell you how to eat right. Blooom actually drives to the grocery store, buys the healthy food and then comes back to your house to cook it for you. There’s a big difference between me sitting down with a dietitian who’s telling me how I’m supposed to eat versus being able to hire someone cost-effectively to come in and actually make those meals for me. That’s the basis for how we built Blooom.

Rob: How does it work? My 401k is at Fidelity. How do you connect to my 401k, make the recommendations then actually, I assume, make the investments and rebalance them from time to time. How does that work?

Chris Costello: Fidelity has the largest market share of all the plan providers. Basically, the way this works is that you come to the Blooom website and launch the Blooom app. Presumably you’ve kind of poked around and figured out what Blooom is. Who the guys are behind it? What sort of experience is this like? How does this work? What are the fees? The truth is, you don’t have to analyze your 401k because the Blooom app itself will analyze your 401k for free.

What happens is, you’d come in and pick your 401k plan provider. In your case, Fidelity. On the next screen you would basically enter your user ID and password that you use to access your account right now through Fidelity. We then use a company called, Yodlee which is a big data aggregator. A lot of major financial institutions use Yodlee. Yodlee takes your credentials— they’re not secured and housed with Blooom. They’re encrypted and kept with Yodlee. In a matter of about 45 seconds to a minute, Yodlee pulls the information out of your Fidelity 401k— meaning the data, how you’re currently invested Fidelity and brings it back to our site, runs it through a filter so we peer back a list of hold on the funds so we can get a true picture of how your account is allocated. And it bounces it off the algorithm that we created for somebody your age with your targeted years to retirement.

On the very first screen you told us your name and you told us how many years until you’d like to retire. So, if I know somebody’s years until they retire, I can tell them what their allocation should be. That’s exactly what we totaled and built into the algorithm. On the next page it shows you, using the analogy of a flower, the health of your 401k. If you’re young and you’ve got it all in cash or money market, for example, the flower is going to look wilted over and dead with a fly on it.

Rob: That would be bad, I assume?

Chris Costello: [Laughter]. Yeah. If you’re 55 years old and you’ve told us you want to retire at 60 and you’ve got 100 percent of your account in stocks, your flower is going to look like a Venus flytrap with thorns and spikes and everything. The point of all that (as we try to develop this) is that we want this to be very, ‘non-typical’ Wall Street. No jargon. No complicated pie charts and graphs which intimidate most people out of the financial sector. Anybody can look at that and say, “Okay, I’ve got a problem. My flower’s dead. My allocation must not be right.”

For someone your age with your time horizon for retirement, on the very next screen we show you how your account should be allocated— we show you the allocation. And you can stop right there and say, “Okay, thanks. I’ll implement that myself.” The challenge is though, obviously, that you’ve got to go back into your 401k and build that— replicate that allocation. We show someone the exact stock to bond mix. You know how much large cap, how much international. We even give folks the ability to tweak that a little bit. There’s a little slider tool on the page that you can grab with your mouse and maybe move… Perhaps you should be 80 percent stocks, 20 percent bonds or you want to be a little bit more aggressive than that. I believe in the long term benefits of having more money in equities, so you can dial it a little more aggressively like that on that page.

Once you’ve come to a conclusion or accepted our recommendation, then you basically get to a page where you enter the debit or credit information and from there we handle everything for you. I want to be very clear when I say this. When I say that we do everything for you— Basically, for the fee that you pay Blooom… Our fee is a dollar per month if your account balance is under $20,000. If you’re over $20,000, the fee is $15 a month. It’s no more complicated than that. There are no more fees other than that, at all. For that, what happens is, you hire us. You give us power of attorney and you give us discretion. That’s included in the legal documentation that you go through and sign. You’re giving us the ability to log into your 401k on your behalf and place those changes for you.

Then about every 90 days the account gets revisited. If the allocation has moved enough, it gets rebalanced. And every two years, as you crawl closer to your retirement date, Blooom adjusts the risk profile of the account to stop the bond mix, giving you more conservative as you draw nearer to your retirement.

Rob: Right. A couple questions come to mind with that. When someone first logs in and you evaluate their asset allocation. I assume it makes recommendations?

Chris Costello: Yes.

Rob: Are you looking at all the mutual funds that are available in that 401k, and I assume, making recommendations based on what one can invest in? Obviously, 401ks have limits to the funds that can be accessed.

Chris Costello: Yes, yes. That’s a great point. Every single 401k carrier is different. The fund choices are different and so on. When we show someone a recommended allocation, we don’t know for certain if we’re going to be able to get that person exactly invested like that until they actually hire us. And when we go in, we actually pull the data from all of the funds. Then we take all of the funds and optimize that allocation to try and get as close as possible to the recommended allocation we showed them earlier.

Sometimes we’re kind of hamstrung. Sometimes if there’s not a robust lineup of funds in cash, Rob, you’d be surprised at some of the larger employers out there whose 401ks we’ve seen they are managing for people, who— you’d be ashamed at the fund lineup… Big companies can do anything they want to do as far as fund choices and how mediocre the actual lineups are. So at the end of the day, we are beholden to whatever choices are inside that 401k. It’s important to note— we’re not moving peoples’ accounts. We’re not opening new accounts. We have to use the 401k that they are in. Generally speaking though, we can get pretty darn close to that allocation we showed them on the screen.

Rob: Okay. Another question. And by the way, while we’ve been doing this interview, I’ve signed up for Blooom for my 401k. I actually have two, so I just selected the largest one to begin with—

Chris Costello: Yep, yep.

Rob: And I have this wilting flower with a bug on it which I assume is bad. Part of the reason—

Chris Costello: [Laughter]. Sounds like you might be a little bit too conservative depending on your current age versus your target retirement date. My guess is you might be a little bit too conservative.

Rob: Well, I think there’s actually a different explanation and that actually brings me to my next question. I pull my asset allocation across multiple accounts; 40ks, multiple IRAs, taxable accounts and so my 401k allocation by itself would look pretty ugly. In fact, in this one, for all I know it could be all bonds. I always get the two confused unless I look into them.

Chris Costello: Right.

Rob: Because I allocate across accounts at Vanguard, Fidelity and other places. How can Blooom deal with that?

Chris Costello: At this point we’re not pulling in allocations outside the 401k. I think at some point down the road, as a future enhancement we will take more of that into the equation. But, so far we have not heard that request enough where it’s at the top of the development queue, if you will.

Rob: Right.

Chris Costello: But certainly some people are allocating across accounts and being more conservative with some accounts versus other accounts. The vast majority of people out there that we want to help… First of all, the market—I don’t think I mentioned the size. There’s 88 million people in the United States that currently have money in a 401k or similar defined contribution plan. For a lot of those people though, Rob, their only account is a 401k.

Rob: Right, right.

Chris Costello: The more sophisticated you gear up, the more wealth you have, you start to get multiple accounts and you start to think about tying in other accounts. So, I would not rule that out as a future enhancement down the road. I mean, the data’s there. As you saw when you logged in, you had a couple of accounts at Fidelity. You could have picked either one of them.

Rob: Yeah.

Chris Costello: The data is out there. We just don’t have it built into the application yet.

Rob: It’s interesting because with robo-advisors, generally… Like with Betterment or Wealthfront, they don’t handle 401ks. But if you had an IRA there or a taxable account, you put your money in, pick your stock bond allocation and they sort of do the rest, but you’re allocating on a per account basis. Each account is fully allocated across stocks and bonds. When you’re doing it yourself, it’s a lot harder to do. That’s why I like to allocate across multiple accounts. And that’s particularly true with a 401k because, as you mentioned earlier, not all of your choices are great.

Oftentimes when I’m doing my asset allocation, I would start with my 401k and say, “Okay, out of a whole lot of bad choice here, do I have a few good ones? Oh, yes. I’ve got some index funds, a Vanguard bond fund. I’ve got a Dodge and Cox fund. It’s actively managed but I like them.” So I’ll start with those to get them out of the way. That fills up my 401k. Then I’ll allocate with what’s left in the other accounts.

Chris Costello: Right.

Rob: But, I think as the robo-advisors move in that’s going to change and we’re going to do a complete allocation on an account-by-account basis. Anyway, that’s just the way I kind of think it through. One thing I’ve noticed is, I’m 48 and I’ve said I’m going to retire at 65 (when Blooom asked me).

Chris Costello: Right.

Rob: And you guys have me in 94 percent stocks. Now, I know I can tweak that. You’ve got the little arrow and I can move that. But 94 percent stocks is pretty rich it seems, to me anyway.

Chris Costello: There’s 17 years until you retire though, Rob.

Rob: Yeah.

Chris Costello: That’s a lot of market cycles. That’s a lot of time that I would not want much of your portfolio allocated to an asset class that’s probably, on a real return basis, going to get you next to nothing.

Rob: Okay.

Chris Costello: That’s the problem we’ve got in this industry right now with these target date funds. Target date funds, so far, has been the industry’s best solution to helping the masses, have been built (in my opinion) not to give the best advice to people but are built so they don’t get sued. Do you know what I mean? What I mean by that is, if you really peel back and risk the hold on a lot of these target date funds you’re fooling with funds that are designed for people that are in their 20s and 30s and might have upwards of 30 years before they retire. They’ll have anywhere from 20 to 30 percent allocated to fixed income.

Rob: Right.

Chris Costello: And I don’t know if these people who are invested in target date funds realize that they’re going to keep 20 to 30 percent of your money there for 30 years and basically just slap an extra zero-rate-of-return on it. And when you ask people to part with these hard-earned dollars to save in a 401k, I think we can do better than that. Blooom is built on the idea that we’re going to give people the advice we think they should have. And you’ll notice that the slider you’re on, can actually—

Rob: It’s fun to use.

Chris Costello: Yeah. And you’ll also notice that you can go too far too. [Laughter].

Rob: [Laughter]. Yeah. I know.

Chris Costello: We won’t let you go too far though. There’s guard rails on it.

Rob: Well, when you get to 19 percent bonds it says, “Caution. You can pick this but we don’t think it’s the best decision.” Then when I got to the far left to 24 percent bonds, it’s says, “Warning. You can’t make this selection.” I kind of imagine it saying behind the scenes, “Rob. You’re an idiot if you pick this…”

Chris Costello: [Laughter]. Right, right.

Rob: “…It’s so bad, that we at Blooom are not going to let you do that!”

Chris Costello: That’s right. Let’s use that example. Let’s say you’re a 30-year-old and you’ve just told us you want to retire at 60 so you’ve got 30 years to go and you’re in the process of signing up for Betterment. We’ve told you we want you to be close to 100 percent in stocks and you say, “No, I want to be 80 percent in conservative bonds and only 20 percent in stocks.” Actually, in that case, Blooom wouldn’t take you as a client. We have our philosophies that we feel like we know what we’re doing. We’re professionals and we’ve been doing this for a lot of years and I’ve always felt that as an advisor, it’s my duty to make recommendations to people. And to go out on a limb and tell people how I think they should be invested and not just what they want to hear. We didn’t build Blooom to be an order-entry system. But, if that person wanted to be that conservative, they can certainly do that. They’d just have to do that on their own. We’re not going to enter those transactions for them.

Rob: Right, right. If I signed up for this—I’ve gotten to the free part while we’ve talked. After the signup then you’d pull in the actual funds that my 401k has and your algorithm would do some more slicing and dicing and say, “Okay, Rob. Here is your allocation. Not only that, but given the 401k fund options, here are 5 funds or 7 funds we think you should invest in and the percentage of each.”

Chris Costello: That’s exactly right. And as we talked about earlier on, you asked in me where I stood on the active versus passive in my opinion or philosophy. Well, part of that algorithm is we’re bias towards index funds. So the first thing that happens is we go through and try to fulfill every sector of the asset allocation pie chart with an index fund.

Rob: Okay.

Chris Costello: In some cases we can do it and in some cases we can’t. The good thing is, I think over the past handful of years, more and more 401k platforms have included more index fund choices. Partly out of industry pressure, partly out of investor demand. They’ve asked for them. So that’s a good thing, I believe, for the investor. Certainly lower costs. I’d even argue better performance. In cases where we can’t fulfill everything in index funds, we still try to look for the lowest cost choices because I can tell you for certainty that in a number of our clients who have signed up for Blooom already, in the changes we’ve made to our allocations; number one, I believe we’ve got better allocations, and number two, for overall cost, we’ve been able to reduce the cost of your 401k in the methodology we use in an amount greater than what they’re paying to Blooom to manage the account for them. There have been accounts where somebody’s got $100,000 signed up for and we’ve shaved 20 basis points, 22 percent off the average intro costs and it’s saved $200 or more in expenses a year even though they’re only paying $180 to Blooom. So, I hope at some point down the road that’s also a feature we can roll out to kind of show them pre and post— Here’s where you were before. Here’s where you are now and here is your cost savings in this new allocation.

Rob: So the most someone will pay for your service is $15 a month? Is that right?

Chris Costello: That’s correct.

Rob: So, $100,000, $180 a month, that’s 18 basis points I think. If I’ve done my math right?

Chris Costello: Yes, yes. It’s good math.

Rob: So if you’ve got $200,000, you’re at 9 basis. It’s going to go down. I mean, 18 basis points is pretty cheap but one of the things I preach here is that every basis point matters. But at some point it’s almost negligible.

Chris Costello: Yeah. We’ve had a handful of clients with $1 million in their 401ks sign up for Blooom.

Rob: What about ongoing contributions? How do those work in the context of using Blooom’s service?

Chris Costello: The automation that we’ve got and are continuing to build out and enhance includes going back into their 401k, making the changes to— You have to make changes in two places in most of the 401k plans. You’ve got to make changes to the current balance, the current dollars in the plan. And you’ve also got to tell the plan where to invest future dollars. So we make a recommended allocation to their existing balance and then mimic that for their future dollars as well. We may make future contributions into the 401k as going into that same recommended allocation that we’ve built for them.

Rob: And Blooom can do all that on its own? It can go into my account— Obviously, if I authorize it…

Chris Costello: Yeah, yeah. That’s exactly it. When you sign up for Blooom, it’s very similar to the engagement that our clients from our other brick-and-mortar firm sign with us. The two big things that we are gaining is power of attorney. Power of attorney to capture and secure their login credentials and utilize those on their behalf to go in and make changes for them. And obviously the second big thing they’re signing over to us is discretion which gives us the ability to make changes to the account without first calling them or getting their consent. Again, that’s the same way that the half a billion dollars we manage at our other firm— it’s the exact same way we work with our clients there.

Rob: If someone has a 401k at their old employer and they’ve left there and they’ve got a new 401k with their new employer, will you guys handle both those for the $15 a month or are there separate charges for each?

Chris Costello: Yeah, but generally we try to give people some more attractive options. There’s a couple of things that person can do. If you’ve got an old 401k that you’ve left behind from a former employer— and most young people, as you well know, are going to switch jobs a handful of times in their career so there is a very high likelihood that everybody is going to have a number of 401ks from former employers, so there are a couple of choices. Right now, Blooom only has the ability to handle one account per email address. There’s a workaround though. If you have a secondary email you can sign up for another account. Obviously that has to change and it’s in what we call our ‘icebox’ which is a term for our development stage. We’d like to be able to handle multiple accounts because so many of our Blooom clients right now, do have old 401ks. The other thing that I try to do and encourage our Blooom clients is, oftentimes you can roll your old 401k into your new employer’s 401k. You cut down on paperwork, you’ve consolidated your assets and you only pay Blooom’s one fee. The third option though, which oftentimes is the best, is to roll that old 401k into a self-directed IRA at a Fidelity or Charles Schwab. Because in those cases, when you get it outside the world of the 401k land and into a self-directed IRA, you’ve got all the choices in the world. We can pick all the index and ETFs that we want to use inside those self-directed IRAs.

Rob: Does Blooom help people with that? Because Blooom is just 401k, right?

Chris Costello: Blooom is just 401k and we do not want to get into— As crazy as it sounds, we do not want to get into the business of capturing those IRA rollovers. We are in some very interesting discussions with some very, very large financial institutions in this country we are in partnership with, that I would rather have those accounts be able to refer to another financial institution and let them handle the rollover.

Rob: Yes.

Chris Costello: The second we get in that business— If Blooom starts handling rollovers, we’d cut off that buyer opportunity to be able to forge those kinds of partnerships so I’d rather leave that open and kind of use that— Blooom can be a phenomenal rollover incubator. You know, for financial advisors or big financial institutions that maybe don’t want to handle and service and help or even have the means to help 401k accounts or smaller accounts. Blooom can handle these and we can do great by these people. I mean, if they retire, change jobs, then maybe their account’s bigger at that point another larger financial institution is more than likely going to help them.

Rob: Let me see if I understand you. I have an odd situation where I have two 401ks, both at Fidelity and both tied to my current employer.

Chris Costello: Okay.

Rob: The short story is, I had one 401k when I was a partner at my firm (I guess for tax reasons) and a separate 401k as an associate, when I was an employee. One is active and one is not in terms of not being able to make contributions to it. But I take it, with Blooom, I’d effectively still have to sign up under two different email addresses at the moment to have Blooom handle both of them?

Chris Costello: Yeah, but I would… Yes, yes that’s right. But I would think that old 401k, the one when you were an associate? You ought to be able to combine that with your new one. I could be wrong, but it’d be worthwhile looking into.

Rob: They don’t allow you to.

Chris Costello: They don’t?

Rob: And, because I’m still at the firm I can’t roll it over into an IRA which drives me crazy too.

Chris Costello: Interesting. Well, in this case you’d have to have—until we get caught up in development for this need, for the time being, the workaround is to use a second email address and sign the second one up.

Rob: You may have answered this, but would that be two $15 charges?

Chris Costello: It is, yeah. Yeah. Exactly. Like I said, the better choices would be (and it doesn’t sound like you can do these) to try and combine them or just roll it out to an IRA.

Rob: The good news is, I doubt very many people listening to this show have the same kind of problem I do.

Chris Costello: I was going to say, I don’t know that I’ve ever run across that before yet so far. So, yeah, that would be a unique situation you’ve got there.

Rob: Mutual companies have been slow. I know Schwab has talked about bringing out a robo-advisor of their own next year.

Chris Costello: They did actually.

Rob: Well, they haven’t launched it yet I don’t think, have they?

Chris Costello: Well, they announced it in early November. But you’re right. I feel like we’re mellow about that early when it comes out because the other $500 million that we’re managing at the other firm, all of that is custody with Schwab.

Rob: Yeah.

Chris Costello: Again, that’s an offering leaving out 401ks. Leaving out employer sponsored retirement plans for other accounts. It’s for rollover IRAs and trust accounts and things of that nature for younger people who want to interact on that basis. Not retirement accounts though.

Rob: Aren’t we getting to the point here soon where your typical, low cost, passive investing, asset allocation kind of investor, that the days of rebalancing yourself even with taxable accounts and tax loss harvesting and all these things— isn’t it just going to be all computer run? Isn’t it getting to the point where eventually that’s going to be where we are?

Chris Costello: Yes, I do. I think that part of the business, yes. It’s only going to be for people that are comfortable transacting their finances online. Right now there’s still a segment of the population that is still going to want and expect face-to-face interaction. Again, as we talked about earlier, the people that are going to get face-to-face are the ones that have the big accounts. Because at the end of the day, if you’re servicing people face-to-face and over the phone, one at a time, there’s only so many hours in a day. You cannot help thousands, if not millions of people. And that’s the wonderful thing about this new chapter that is opening up in financial services. It is 100 percent due to technological innovations that we can now scale to portfolio management. And that is awesome because so many people in this country have not been able to get this because they didn’t have two, three or four commas in their account balance and they couldn’t get access to really good, qualified professional advice. Now, through tools like Blooom, the same advice that I would give to someone with $10 million in their portfolio, you can get that advice if you’ve got $1,000 in your 401k.

Rob: Yeah.

Chris Costello: That’s a really, really great thing. And Blooom is only one player on this stage. I know there is going to be more competition for us, especially in the retirement planning market. But that’s okay. This market, this opportunity— this problem is so big that it’s going to take a number of companies— It’s going to take people like yourself, Rob, that are out there on the front lines drawing more awareness to this and helping educate people. Up until this point, I know if you’ve been wanting to address your 401k but haven’t got around to it because there weren’t any tools out there to help. Well now, guess what? Now there is.

Rob: Right, right.

Chris Costello: But now, for one dollar a month or $15 a month, there are tools available for you. It’s the same thing that the wealthy people have been given for years and now you can get that in your portfolio or 401k. All these things are positive. It’s going to take more when, you know— it’s an entire industry that’s going to have to come together and spread the word to help these people. Otherwise we’re going to have an entire generation of people that are going to roll up on retirement’s doorstep in 30 or so years and are going to be, financially, in a lot of trouble.

Rob: Chris, tell me… Why isn’t there a Blooom for IRAs and taxable accounts? What I mean is this… I know there’s the Betterment’s and the Wealthfront’s where you take you money and send it to them. They don’t go into your Vanguard account or Fidelity account and do what Blooom does for a 401k, right? It’s sort of its own separate thing. There is another company, Future Advisors, which is kind of like Blooom, but there again, you have to have your money a custodian at either TD Ameritrade or Schwab, I think. Why isn’t there an application like Blooom that can sit on top of any mutual fund company or broker and do for the IRAs and taxable accounts what Blooom is doing for a 401ks?

Chris Costello: So you don’t feel that Wealthfront and Betterment or Future Advisors are there yet? I mean, I think they’re doing a great job in that space.

Rob: Well, they are. Except that, in my case, I’d have to call up Vanguard where I’ve had my money forever and say, “Okay, we’re going to transfer everything to some new company.”

Chris Costello: Okay.

Rob: And, by the way, those companies— I have a Wealthfront and a Betterment account so I’m exploring both of them. But they don’t have all of their investments at Vanguard. Which is fine. I think Vanguard is best but there are some other really good ones. And I can’t tweak my asset allocation like I apparently can with Blooom. I’m just curious. Maybe that’s just the model that they’ve chosen. I guess in some ways you can say they are kind of a frontend for Vanguard. Most of the ETFs they use are Vanguard and maybe a few others but it just—it would seem easier to me to just do the Blooom approach. And certainly, Blooom is cheaper.

Chris Costello: Yes. Well, I think I can answer that because it’s really the same answer for why are there not more direct competitors in our space right now which I would be a fool to think there won’t be in time. But I think the biggest reason is it is much easier to build a scalable service when you’re dealing with non employer sponsored retirement accounts. The reason why is Betterment and Wealthfront are able to— obviously all the money is in custody at one place, so when we’re building out their trading algorithms and they’re only having to interface with one single solitary custodian, it’s a night and day difference. We have to build our technology, which we’re doing right now, to interface with hundreds of different ones like Fidelity, Principal. JD Morgan which is now part of Great West. You know, Mass Mutual, Vanguard, T Rowe Price, American Century. Hundreds and hundreds of them…

Rob: You don’t have a choice.

Chris Costello: Yeah. So I think that’s probably why they chose to go that route. It’s a more, quicker, scalable way of getting traction. I think their opportunity is much bigger in their retirement plan space from the volume and number of participants, but it’s certainly, night and day, more difficult. We’re committed to this and so far we’ve been able to build this out, funded by the three co-founders. Fortunately, we’ve got the resources to be able to do that. But going forward we’re starting to look at some outside capital and partnering with the right kind of people that can help us with scale and distribution because there is still a lot more to go to enhance and develop this. But it’s a wonderful problem to be tackling. You know, it’s one thing to build a great business but it’s another thing to think about how many people we can potentially be really making a difference for 30 years down the road. We’ll never know, but maybe, just maybe, because of Blooom someone might be able to retire early or have more money in retirement. Not to get too personal but I sometimes think about my Dad. My Dad passed away two years ago. He was 63-years-old and never had one single day of retirement. What if Blooom had existed 35 years ago and he had been a Blooom client who would have been able to retire at age 55? He would have got 8 years of retirement instead of none. That’s the type of impact I think we’re going to have and that’s what wakes me up at 5:00 in the morning with new ideas to mull over with the other two co-founders. It’s a very exciting company to be building.

Rob: Well, since you got up at 5:00 this morning and I’ve already taken up 45 minutes of your time, two last questions and I’m done.

Chris Costello: No problem.

Rob: What happens to Blooom, Wealthfront, Betterment, Future Advisor and other mutual fund companies when Schwab, then Fidelity, Vanguard and others move in and build these same tools telling people they can have these tools if they move over to Vanguard. That you’ll be able to easily automate your asset allocation while they rebalance for you. And if it’s a taxable account they’ll do all the tax-loss harvesting for you and all those sorts of things?

Chris Costello: Well, very quickly my money would be on Blooom, Wealthfront, Betterment, Future Advisor before any of those big companies. I just think the companies that stand to innovate the most are not the entrenched businesses. I think they are these new generation of advisors that are springing up. And correct me if I’m wrong, but I believe it’s not the big that eat the small, it’s the fast that eat the slow. We can innovate very quickly. We’re not afraid to try new things. So I am not too worried about the bigger companies coming into the space. I actually think that could be a good thing because, as I was talking about earlier, the more attention that can be drawn to this segment, this need, this problem, I think benefits us all. Because more clients will be aware of the fact that there are options out there for them and they’ll begin to poke around. And I believe Blooom stands to get a lot of those clients.

Rob: It’s interesting. Vanguard loves the robo-advisors because they all use Vanguard funds, right?

Chris Costello: [Laughter].

Rob: It’s not competitive with Vanguard. It’s the other mutual fund companies that think, “Holy cow, we might be losing… Every time someone leaves us to go to Betterment, we lose all this business.” Vanguard doesn’t. If someone leaves Vanguard to go to Betterment, the money still stays at Vanguard. It will be interesting to see how some of the other mutual fund companies deal with it. Okay, the last question is this… What’s it going to take for you guys to be profitable? I know you’re a private company and you don’t disclose your finances, but how can you make a profitable business charging just $15 a month?

Chris Costello: Well, it’s all based on scale. We’re in a business where, obviously, we need hundreds of thousands— if not even millions of clients and that’s something I don’t mind disclosing at all. That’s our goal. Our goal is to help more than a million people with this. And behind the scenes, obviously, the technology has to automate virtually everything. That’s the wonderful thing about this when you’re building these portfolios, is that the technology really creates a perfectly delivered, recommended allocation every single time. In the old school way, you’re working with an advisor whose thoughts and philosophies might filter into the room that day. But with these algorithms which are perfectly repeatable, the same advice can be delivered over and over again. That’s how you build a business that’s very profitable and doesn’t need to charge much. That’s the wonderful thing about this new chapter that’s opening in this space is that through technology, software and service, we can now build out solutions for a lot of people and still have a wonderful business too.

Rob: Well, listen. I really appreciate your time today. It sounds like you guys have built an excellent tool. Like I said, I kind of checked it out while we talked and I’m going to look into it further and perhaps use it for my 401k.

Chris Costello: Great.

Rob: But I really appreciate your time today and I wish you guys the best of luck. I think it’s great what you’re doing.

Chris Costello: Thank you, Rob. And happy holidays to you and all your listeners.

Rob: You too. Alright. Take care.

Chris Costello: Thank you.

Rob: Bye.

Author Bio

Total Articles: 1083
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments


So glad you had Chris from Blooom on the show. I have been using them for a little while now and I am so happy with the company.

Rob Berger says:

Christa, thanks for letting us know. It seems like an excellent, low cost service.

Mark Ardito says:

I have a question regarding the asset allocations from Blooom. I went as far as I could for free, where they made the Blooom recommendations for my age. My question is this; do they make these allocations based upon market data and do they update them (how frequent), or are the allocations set and never move based upon market fluctuation.

Rob Berger says:

Mark, I reached out to Chris Costello, and here is his reply:

We have EXTREMELY strong opinions about the fallacy (if not fraud) of market timing. Simply stated, we believe that it is not possible to interpret market data, regardless of how robust or detailed, and make consistently accurate decisions about moving money in and out of the market or in and out of certain sectors of the market. There are reams of empirical evidence backing up our beliefs. Nevertheless, Wall Street and certain parts of the mass media have propagated the myth about market timing and as a result, there is a segment of the population that has “bought-in” to this notion. Now don’t get me wrong, it is always possible to get lucky from time to time and call it exactly right. I also believe that if you sit enough monkeys in front of a computer, eventually one of them will type out the Star Spangled Banner.

Since we do not attempt to time markets, what do we focus on?
The 2 things that investors actually CAN control: 1.) Cost 2.) Behavior.

We help drive down blooom clients’ 401k costs by having a bias for index funds. To the extent that the blooom client’s 401k fund options include a healthy selection of index funds we are able to really cut expenses. Even if the 401k fund options don’t have a lot of index fund choices, part of our algorithm will select the actively managed funds with the lowest internal expense ratio.

Behavior, this is hard to explain and certainly hard to quantify. We try to educate our blooom clients in a way that generally isn’t and never has been done by Wall Street. We help set expectations that the market will go down from time to time and that is OK. Not only is it OK, it is NECESSARY. Basically, the more we can coach-up our clients, the lower the chances are that they will try to chase hot funds, or stop contributing to their 401k when the market drops and all their investments go on sale, or attempt to time the market.

We have constructed a beautifully diversified, global allocation for our clients that adjusts FOR them as they move closer to retirement. BUT…these adjustments are not (or never will be) based on some random prediction about the market or economy.