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WealthTech Insights #41 with Chris Costello: Rebalancing and Revamping the FinTech Industry

We continue to pick the brains of the biggest FinTech experts this week with Chris Costello, cofounder and chairman of blooom—the retirement portfolio management platform built to serve people from all walks of life.

Chris Costello
Cofounder, Chairman at blooom.

Chris’s philosophy surrounding his business practice revolves around changing the way people think and behave when it comes to their investments. He shared his view of risk management, rebalancing approaches, and what he believes are the major drivers in the FinTech market today.

Since the mid-‘90s, Chris has been deeply involved in finance. Fresh out of college, he worked for several of the large Wall Street based brokerage firms. After hooking up with Kevin Conard, in 2004, The Retirement Planning Group was founded. It aimed to do what the name says—help people plan for retirement wisely. In 2013, Chris, Kevin, and Randy AufDerHeide launched blooom because they felt the financial services business model was flawed in that almost the entire industry is focused on and incentivized to help the wealthiest Americans. The cornerstone of blooom is a deeply ingrained desire to give the average American a brighter future after retirement.

Chris and I discussed the current trends in financial technology, how rebalancing and tax optimization play a role in software development, and the underlying principles of when to invest in the stock market.

Risky business

From over 20 years of first-hand experience dealing with clients face-to-face, Chris has come to the conclusion that risk-profile questionnaires are misleading. He explained that risk-profile questions can be answered differently depending on the state of the market. Chris said that in his experience people answer these questionnaires according to their emotional state at that point in time, rather than with logic.

“If you put a risk-profile questionnaire in front of a client today, when let’s say the Dow Jones Average is near 25,000, and then you take that exact same risk-profile questionnaire, let’s say six months from now when the market crashes and the Dow drops to 18,000—you give that same client those same questions, they will answer them radically differently.”

Instead of complex risk profile questions, blooom utilizes an intuitive slider tool in the onboarding process and post-client experience. This slider tool allows the client to have input into the risk tolerance of the portfolio.

Stable market = bad choices

Since 2008–2009, the market has stabilized and has seen growth. From Chris’s perspective, when the next downmarket hits he expects to see clients tempted to shift the slider tool towards the conservative side. Unfortunately, this is probably going to be the wrong decision because market declines have historically been the best time to be more aggressive when the market is volatile.

“Most people, when they’re dealing with their life savings and their money, tend to make decisions using the emotional side of their brain, which reacts more strongly to fear. It also reacts more strongly to greed, which is why we saw people chasing inflated stocks during the dot-com bubble of the late 1990s.”

Chris strongly believes that the trends towards optimization, portfolio performance, reduced fees, and predicting the market are less important than learning and fixing a client’s behavior. When it comes to investments, a lot of money is lost on poor decisions and people chasing returns rather than investing rationally. Chris’s hope is that blooom’s tens of thousands, and some day hopefully millions, of clients can be protected from making investing mistakes triggered by emotion that could be severely detrimental to their future.

“If you’ve got a great portfolio with a great allocation and you bail out of that when the market goes down or you try and time the markets by getting in and out, that is bad behavior and that is not going to work—that is one of the biggest destroyers of wealth in this country.”

Chriss Costello

Finding clients

Blooom’s primary channels for new clients include referrals and organic growth. Clients often times find out about blooom through word of mouth, affiliate partnerships and advertising. Right now, blooom’s marketing efforts are fairly diversified, although Chris pointed out that there’s no one silver bullet that can account for the biggest piece of the pie.

Rebalance and readjust

The blooom platform has rebalancing tools for changing the balance and positions of investments based on the glide path. As a person gets closer to retirement, blooom tweaks the allocation based on algorithms. However, as Chris explained, blooom is set up to manage 401ks without deep customization. The portfolio-management tools in the platform were built for people that are not quite sure what to do with their 401k and are looking to minimize fees and secure a nest egg for their retirement years.

“For example, let’s say a person’s 40 years old and they want to retire at 60. Hypothetically, blooom could recommend that person—with 20 years until they retire—have 80% in stocks and 20% in bonds. The customization we would allow for is [that] we give our clients a slider tool that they can manually adjust if they’re comfortable taking more risk (more stock exposure) than what’s recommended by blooom. So that slider tool basically allows customization at the stock to bond level, but not at the position level.”

Blooom’s target market and the majority of their clients have the ability to adjust their risk tolerance and their retirement date, which reflects in the account as rebalancing.

Final thoughts

As Steve Jobs famously said, “Simple can be harder than complex: you have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” Blooom simplifies retirement for the average person with their down-to-earth attitude—a rare commodity in the modern finance industry.

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Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also the author of WealthTech Club, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.

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