Advancements & Achievements« Back to Advancements & Achievements Listings
From Wall Street to Kansas City: Greg Smith on Financial Reform
Disrupting Retirement Financing at Blooom
By SABLE Staff
Three years ago, Greg Smith shook the foundations of Wall Street with a famous Op Ed to the New York Times, entitled “Why I am Leaving Goldman Sachs.” The South African expatriate’s courageous public resignation – and his bestselling book that followed – exposed a culture of greed and recklessness within the investment banking system, triggering a global debate on customer-oriented reform.
The former Goldman derivatives vice president has since been invited to have a more direct role in the reform process, and has contributed his unique perspective on the need for clarity in the application of the Volcker Rule, in particular.
But, this week, Smith revealed to BPI and SABLE that his experience in both Wall Street and Washington has made it clear to him that neither legislation nor market forces nor even consumer education could swiftly generate the kind of protections citizens need most within the financial services sector.
And no change is needed more, he says, than in the structuring of 401k plans – in which four out of every five 401k's are “incorrectly invested,” and average Americans unwittingly pay almost $150,000 in fees.
Instead, the former King David Linksfield schoolboy concluded that there was only one force which could sidestep institutional winds that were stripping billions from American pockets each year: technology innovation. This spring, Smith accepted the role of President of a Kansas City-based start-up whose mission is nothing less than to use innovation to help save Americans’ retirement nest eggs.
Like America’s Cup sailboats which achieve their greatest speed toward the wind, the software products at blooom – after just two years - are slicing through the headwinds of 401k plans at a rate which suggests a revolution in the retirement market.
Blooom’s research shows than an astonishing 83% of all 401k plans analyzed are wrongly invested. This week, Time magazine carried a “call to action” essay by Smith, in which he states that the entire 401k system is “as hard to understand, opaque and predatory as ever.”
He wrote: “Two thirds of Americans do not know that they pay fees on their 401k plans, and 90% of people could not accurately tell you what these fees are. Why? Because they never actually write a check to anyone—the fees are automatically deducted from their accounts.” In just one game changing innovation, Blooom’s smart app on average slashes 401K fees from approx. 0.8% of assets per year to approx. 0.3%. “For example, Americans pay $600 billion in mutual fund fees annually - we think a lot of that is unnecessary; and can certainly be made significantly lower.”
As for their own fee structure: there are no “basis points” or “expense ratios” for people to muddle over. Instead, Blooom’s disruptive flat fee structure simply charges either $1 per month or $15 per month, depending on your retirement account balance; that’s it.
Their revolutionary solutions have earned them the status of Word Top Ten Company in Innovation (Personal Finance) for 2015 by Fast Company, and a Best of Show Award at the 2014 Finovate.
Smith says their products are founded on these twin, blunt assessments: that good financial advice is currently the rare privilege of those with over $1 million in investment wealth, and that the system is simply too complex for "Do-It-Yourself" planning.
To avoid another generation of mass waste and fleecing, new software customized to the needs of individuals of all ages was required to literally take over American retirement planning.
“There are other innovative companies out there which help people invest, but blooom is the only company in America that can fix any 401k for any employee, across any company,” says Smith. “Using new software, we drastically reduce costs and rebalance people’s 401Ks seamlessly over time.”
Smith insists that there are no hard feelings – on a personal level - between himself and the Wall Street community, three years after the media storm. “In fact, most people I’ve spoken to share my feelings that reform and a greater focus on customers is needed,” he says. In the furious wake of the Op Ed time, Smith – the son of an Edenvale pharmacist and a homemaker – told this reporter that the moral imperatives of his Jewish upbringing in South Africa had provided the impetus for his public stand for customers.
And the 36-year-old Stanford alumnus says that same principle is now guiding his new career.
But he says his 11 years on Wall Street have convinced him that there is no reason why the efficiencies his team once brought to large sovereign wealth funds could not be transferred to retail investors – and that you simply cannot beat the market with Do-It-Yourself planning. It also taught him this: “As you add complexity, you add opportunities for institutions to take advantage of people. Finance is complex – and so it can charge high fees, but new technologies mean that no longer needs to be the case.”
Smith also admits that – although his own base will remain in Manhattan – it is no coincidence that he chose a financial services company far from those skyscrapers as the catalyst for a movement for disruptive change. Founded by three leading Midwest financial advisors, blooom is head quartered in Kansas City. Says Smith: “Kansas City is a hugely exciting startup base where a lot of innovation is quietly going on, but I found that it’s the customer-oriented culture of the approach there that makes it ideal for financial services innovation. There is a lot of groupthink on the East Coast – and even in Silicon Valley – in this sector, and the fact is that there is actually very little innovation going on in finance – and where it is happening, it is to help institutions make more money, rather than to make the lives of customers easier and better. Think about it: finance is one of the few industries – along with healthcare and possibly education – where technology innovation has not yet brought costs down for individuals. In Kansas City, the business style is to sit across from customers and look them in the eye – not reverse engineer ways of extracting wealth from them. The founders of blooom have layered this philosophy on some pretty amazing technologies to find a very exciting new way to optimize 401Ks.”
Chris Costello and his co-founders had previously provided customized financial advice to wealthy customers – “most, within spitting distance of retirement.” How on earth – they wondered – were middle class, lower-middle class and younger individuals managing the hyper-choice and hidden costs of the massively complex system? The answer? Four out of five had the wrong investments – especially, in expensive actively managed funds – and most were unknowingly blowing fortunes on needless fees.
And yet almost everyone spent more time plotting the purchase of a car than on planning his or her most important single investment asset. For Costello, the DIY approach was akin to “performing surgery on yourself.”
Smith says he was working on his own platform for simplifying retirement planning for young people when he encountered blooom’s presentation on its official launch at Finovate last year – “and I was blown away. “They weren’t trying to build just another tool for the financial institutions, they were genuinely trying to improve the retirement prospects for millions of Americans, using the reach of technology, and a highly appealing business model. We had hours of discussions, and there was a real meeting of the minds. Within 9 months, blooom already has customers in 48 states; people from age 22 to 67 use our products, and we’re approaching $100 million in assets under management. And we literally want millions of customers – we want every CEO in the country to see the savings we’re offering. Most corporations offer 401k plans that are super inefficient, and at a very high cost for employees. In the worst cases, what’s appalling is that some corporations actually see these plans as a profit center – working on Wall Street makes you attuned to these kinds of conflicts.”
Blooom’s solution is radical – literally taking over your 401k.
Costello’s analogy is of hiring a dietician (for a flat fee) who also buys your groceries – optimal to your nutritional needs – and then cooks your meals. Except that a DIY management of a 401k is far more complex than healthy eating. It brings to mind Tommy Lee Jones’ character in “Space Cowboys,” stubbornly insisting that he can land the space shuttle during a storm with its computer turned off.
For Smith, the technology take-over model works on the basis of a safe assumption that any new legislation to simplify the retirement system will be inadequate, and will simply take too long. After less than two months as President, Smith is moving fast – growing blooom’s presence on the East Coast; generating another key public debate through Time magazine; and linking with key Silicon Valley Networks, including the Business Performance Innovation Network (BPI) and the South African Business Link to Experts (SABLE).
Smith says: “We are in completely new territory – the major incumbents in the retirement space are old stodgy companies focusing on baby boomers, who are retiring now. Blooom focuses on young people, who like using technology to make their lives simpler; people whose investments should look very different from those entering retirement.” He adds: “Its just so exciting for me personally, being involved with an enterprise like this. If you can go directly to people, and give them something simple, that puts a lot of money back in their pockets - that’s how you reform a system.”
Greg is taking defined contribution help where it’s never been taken before…here, there and everywhere. As the author of an Op-Ed and New York Times Bestselling book “Why I Left Goldman Sachs,” he’s advised legislators, regulators, pension officials, and corporate executives on financial policy and fiduciary duty. He’s fully engaged and tuned in to championing help for all investors. Greg has a Stanford economics degree and 11 years of Wall Street experience advising Sovereign Wealth Funds, Mutual Funds and Pension Funds, and is building out blooom’s NYC office. Check out his BPI Network Game Changer interview here.