WEBVTT - Interview With Jeff Maggioncalda: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.080 --> 0:00:11.119 This week on Masters in Business on Bloomberg Radio, I 0:00:11.200 --> 0:00:16.400 have a really interesting guest. His name is Jeff Magian Calda. 0:00:16.600 --> 0:00:20.600 He is the co founder and CEO of Financial Engines. 0:00:21.400 --> 0:00:23.959 A reader and a fan of some of our early 0:00:24.360 --> 0:00:27.080 earlier podcasts had written in and said, hey, you know 0:00:27.200 --> 0:00:29.640 you should interview you should interview this guy, Jeff Magian 0:00:29.720 --> 0:00:33.080 Calda of Financial Engines. Are you familiar with them? And 0:00:33.120 --> 0:00:35.559 I said yes, I actually am very familiar with them. 0:00:35.560 --> 0:00:39.040 Their public company, uh, they run a hundred plus billion 0:00:39.080 --> 0:00:43.560 dollars in assets, and Bill Sharp, the Nobel Laureate economist, 0:00:44.000 --> 0:00:47.400 is essentially uh, the founder and the guy who put 0:00:47.479 --> 0:00:50.680 the original idea together. And I said, I would love 0:00:50.720 --> 0:00:52.559 to interview Jeff. I don't know him. I don't know 0:00:52.560 --> 0:00:54.920 how to reach him. I don't know his his information 0:00:55.000 --> 0:00:57.240 is in public. How do I how do I find 0:00:57.280 --> 0:00:59.640 this guy? And the reader said, well, I know them. 0:00:59.720 --> 0:01:02.400 Let me make an introduction. And that was about six 0:01:02.440 --> 0:01:05.400 months ago. He Jeff lives in Palo Alto. He's on 0:01:05.400 --> 0:01:07.319 the West Coast. He's not in New York all that often. 0:01:07.840 --> 0:01:11.320 And when I pinned him in made the offer of Hey, 0:01:11.360 --> 0:01:13.080 you should come on the show. Here's who we've had on, 0:01:13.200 --> 0:01:16.880 here's what it's about. He said, Um, that would be interesting, 0:01:16.920 --> 0:01:20.600 but I'm I'm rarely in New York. Two weeks ago, 0:01:20.680 --> 0:01:22.880 I said, Hey, any chance you're in New York anytime soon. 0:01:22.920 --> 0:01:24.880 He's like, yeah, I'm in New York on on the 0:01:24.880 --> 0:01:28.600 week of the of the first of the month. Let's 0:01:28.680 --> 0:01:30.479 let's see what we can schedule. So here we are. 0:01:30.680 --> 0:01:33.800 It was really a fascinating conversation and I think you'll 0:01:34.120 --> 0:01:37.039 really enjoy it. So, with no further ado, here is 0:01:37.080 --> 0:01:41.479 my conversation with Jeff Magian Calda, co founder and former 0:01:41.560 --> 0:01:48.760 CEO of Financial Engines. This is Masters in Business with 0:01:48.800 --> 0:01:53.000 Barry Ridholts on Bloomberg Radio. This week on Masters in 0:01:53.040 --> 0:01:57.360 Business on Bloomberg Radio, I have Jeff maggian Calda. He 0:01:57.560 --> 0:02:02.040 is the founding CEO of Financial Engines. Now, you, as 0:02:02.080 --> 0:02:05.320 a lay person, may not have heard of Financial Engines, 0:02:05.360 --> 0:02:10.840 but it's really an interesting company with a fascinating history. Uh. 0:02:10.880 --> 0:02:14.359 They are currently the largest r I A in the country, 0:02:14.440 --> 0:02:18.720 managing over a hundred billion dollars in assets. They were 0:02:18.760 --> 0:02:23.000 founded by Nobel Laureate Bill Sharp. Uh, we'll talk a 0:02:23.040 --> 0:02:26.480 little bit about Bill later. And Jeff was tapped by 0:02:26.560 --> 0:02:30.040 the three leading investors of the firm, literally right out 0:02:30.040 --> 0:02:33.480 of his Stanford NBA program to take what was then 0:02:33.520 --> 0:02:39.000 a free website offering suggestions for asset allocation models and 0:02:39.040 --> 0:02:42.600 turn it into the powerhouse that it's become today. Jeff, 0:02:42.639 --> 0:02:45.240 welcome to Bloomberg. Thank you glad to be here. So 0:02:45.639 --> 0:02:47.840 let's let's talk a little bit about that history, because 0:02:47.880 --> 0:02:52.440 it's so it's so amazing. Bill Sharp essentially created a 0:02:52.520 --> 0:02:57.040 free website. Hey, I developed the capital asset pricing model, 0:02:57.320 --> 0:03:00.840 eventually winning the Nobel Price for that. And here's the 0:03:00.880 --> 0:03:03.440 output of that work. You could play with this for 0:03:03.480 --> 0:03:06.440 your retirement accounts. It's free on the site. How did 0:03:06.480 --> 0:03:09.760 that morph into what's now with publicly traded company? Well so, 0:03:09.760 --> 0:03:13.000 so Bill, he's he's a genius and he is very 0:03:13.040 --> 0:03:15.639 well meaning. He's always wanted to use the work he's 0:03:15.680 --> 0:03:19.360 done to help people. Um. He has also been a 0:03:19.400 --> 0:03:22.399 total gear head and sort of hacker since the early days. 0:03:22.440 --> 0:03:24.760 He wrote one of the first compilers for the Basic 0:03:24.880 --> 0:03:27.600 programming language back in the day, and so he had 0:03:27.600 --> 0:03:31.200 his own son's sparkstation as which is his own web server. 0:03:31.280 --> 0:03:33.000 At the time, this is the beginning of the internet. 0:03:33.560 --> 0:03:35.760 No one, no one had personal computers in right, and 0:03:35.800 --> 0:03:37.960 he has like a note on the darknet or something 0:03:38.440 --> 0:03:40.760 and uh, and so he thought, you know what, I 0:03:40.760 --> 0:03:43.960 can write some simulation software and some some optimizers and 0:03:44.000 --> 0:03:46.960 I can make this available because I mean he saw 0:03:47.080 --> 0:03:50.720 early on that the demographics of the baby boomers, uh, 0:03:50.800 --> 0:03:53.520 and the shift away from defined benefit plans towards four 0:03:53.520 --> 0:03:55.520 O one case was going to mean a lot of 0:03:55.520 --> 0:03:58.640 people had a new responsibility to invest, but but really 0:03:58.720 --> 0:04:01.120 didn't get access to very good advice, so didn't have 0:04:01.160 --> 0:04:03.600 the skills, didn't have access to people who can help 0:04:03.640 --> 0:04:06.560 them in so many for one case, are under a 0:04:06.640 --> 0:04:09.400 hundred thousand dollars. Nobody is really going to take that 0:04:09.520 --> 0:04:12.560 as a as a client. That just doesn't work. So 0:04:12.560 --> 0:04:14.720 so what did he do with that? So he started 0:04:14.760 --> 0:04:16.880 a website and back in the days where they used 0:04:16.880 --> 0:04:20.200 to index popularity, it was actually a pretty popular site. 0:04:20.240 --> 0:04:22.200 But you know, among the people using the internet the time, 0:04:22.240 --> 0:04:26.359 which were kind of the more actively technically, it was 0:04:26.480 --> 0:04:29.360 much more of a crowd. It was very much else. 0:04:29.400 --> 0:04:33.640 So his buddy Joe grin Fest, lawyer at the law school, 0:04:33.680 --> 0:04:37.520 former SEC commissioner. Um. He said, Bill, if you really 0:04:37.520 --> 0:04:39.280 want to make a difference, you gotta start a company. 0:04:39.480 --> 0:04:42.320 Bill was not really interested in starting a company. He's like, look, 0:04:42.360 --> 0:04:44.039 I want to do something good for the world. I 0:04:44.120 --> 0:04:47.600 don't really want to charge money for it. And Joe said, 0:04:47.720 --> 0:04:50.600 if you want people to really promote the idea and 0:04:50.839 --> 0:04:53.320 create a good product that people can really use, you 0:04:53.440 --> 0:04:56.320 got to start a company. So so you're saying Bill Sharp, 0:04:56.400 --> 0:05:01.120 noble laureate, kind of a wonky academic. Is that the description? 0:05:01.880 --> 0:05:04.680 Why does that not surprise? Yeah? Yeah he he uh 0:05:05.440 --> 0:05:10.479 his his his his pursuit of sort of the intellectual breakthroughs, 0:05:10.680 --> 0:05:13.680 and this pursuit of doing good in the world definitely 0:05:13.720 --> 0:05:18.200 trumps his pursuit for financial gain. Not not uncommon. You 0:05:18.200 --> 0:05:22.520 look at people like Bob Schiller or Jeremy Siegel, or 0:05:22.520 --> 0:05:24.599 when when I spoke with Siegel, it was he was 0:05:24.640 --> 0:05:26.800 amazed that he made any money because that wasn't what 0:05:26.920 --> 0:05:29.320 he ever expected. He expected to just toil away and 0:05:29.920 --> 0:05:33.760 academic obscurity and have a satisfying life. It sounds like 0:05:33.839 --> 0:05:36.839 Bill is Sharp is similar very much so. So so 0:05:37.440 --> 0:05:42.680 you're tapped. You're literally twenty seven years old, just graduating, Uh, 0:05:42.839 --> 0:05:47.320 Stanford NBA program. What's it like when a couple of 0:05:47.360 --> 0:05:50.600 heavy hitters like Sharp and Grunfest and who's the third 0:05:51.600 --> 0:05:58.400 Craig Johnson. Craig Johnson also not no lightweight. Um says, hey, kid, come, 0:05:59.120 --> 0:06:01.080 we got an idea for you. How do you how 0:06:01.120 --> 0:06:03.240 do you respond to that? Well? So, so I was 0:06:03.400 --> 0:06:06.120 at the time, I had I had worked for McKinsey 0:06:06.200 --> 0:06:08.880 over the summer. I had taken a full time job. 0:06:09.000 --> 0:06:11.640 So I my wife had spent the signing bonus on 0:06:12.160 --> 0:06:15.240 new furniture, and we had two kids. We were weigh 0:06:15.240 --> 0:06:18.040 in debt and the big sum of money comes and 0:06:18.080 --> 0:06:20.080 what did the economists say when you get a windfall, 0:06:20.160 --> 0:06:22.040 the propensity to spend is like one you like, just 0:06:22.080 --> 0:06:27.080 spend it? And uh. So she did and um and 0:06:26.000 --> 0:06:30.880 the account and uh And I had been approached by 0:06:30.880 --> 0:06:33.919 our professor at the business school, h. Robert Bergelman. He 0:06:34.000 --> 0:06:35.760 at the time, I think he still teaches, And he 0:06:35.760 --> 0:06:37.560 taught a class with Andy Grove, who was at the 0:06:37.560 --> 0:06:40.640 time the CEO of Intel on kind of strategy and 0:06:40.680 --> 0:06:43.719 information technology. And they had no cases on the internet. 0:06:43.920 --> 0:06:45.719 And so as an undergrad. I was an English and 0:06:45.760 --> 0:06:49.240 economics major, so I knew about statistics and quant stuff. 0:06:49.240 --> 0:06:50.640 I knew how to write, and they said, would you 0:06:50.680 --> 0:06:52.440 be a case writer and write a bunch of cases 0:06:52.440 --> 0:06:54.760 on the internet. So I said that would be fun 0:06:54.800 --> 0:06:56.960 to do. I called McKensy. I said, well, you know, 0:06:57.080 --> 0:07:00.039 I'll becoming in January. And then it was during the 0:07:00.040 --> 0:07:01.600 time that I was writing cases that I got this 0:07:01.640 --> 0:07:04.280 call from Joe grin Fast, who I had worked with 0:07:04.440 --> 0:07:09.360 previously at at a litigation consulting firm. And I was like, 0:07:09.520 --> 0:07:11.840 Bill Sharp was my hero. It was amazing because when 0:07:11.880 --> 0:07:16.720 I graduated in he had received the Nobel Prize the 0:07:16.760 --> 0:07:19.720 year before, and he was my graduation speaker. And I 0:07:19.760 --> 0:07:21.680 just thought this guy was the most amazing guy in 0:07:21.680 --> 0:07:23.760 the world. And I love the elegance of his model. 0:07:23.800 --> 0:07:26.280 I thought his overall philosophies. I totally bought into it. 0:07:26.360 --> 0:07:28.800 You know, generally speaking, he can't beat the market, so 0:07:28.960 --> 0:07:30.440 go for a low costs. I thought that was great. 0:07:30.720 --> 0:07:32.760 I think by the way, that's managed to catch on 0:07:32.960 --> 0:07:35.840 quite a bit. It seems to have pretty well among 0:07:35.960 --> 0:07:39.840 the the investing public. So so so I was really 0:07:39.920 --> 0:07:42.640 kind of stuck, and I was like, well, I'm kind 0:07:42.640 --> 0:07:45.520 of tied up right now. And and I talked to 0:07:45.560 --> 0:07:49.680 my wife, who's you know, PhD and evolutionary biology. She's like, Jeff, 0:07:50.360 --> 0:07:52.320 you have to do this. This is a once in 0:07:52.320 --> 0:07:54.880 a lifetime thing. You have to do this. We'll figure 0:07:54.880 --> 0:07:57.560 out the the money and I we'll figure that stuff 0:07:57.600 --> 0:08:01.000 out later. And uh and so I'll like, you're totally right. 0:08:01.040 --> 0:08:02.480 I mean, how often do you get to work not 0:08:02.520 --> 0:08:05.200 only with the Nobel prisminer, but with like a hero 0:08:05.320 --> 0:08:08.160 of yours? Uh And and so I sort of took 0:08:08.160 --> 0:08:11.440 the plunge, not having any idea what I was gonna do. 0:08:11.600 --> 0:08:14.240 I'm Barry Ridhults. You're listening to Masters in Business on 0:08:14.280 --> 0:08:18.880 Bloomberg Radio. My guest this week Jeff Magian Calda. He 0:08:19.120 --> 0:08:23.280 is the co founder and former CEO of Financial Engines, 0:08:23.360 --> 0:08:27.080 the country's largest r I A, which manages over a 0:08:27.160 --> 0:08:30.200 hundred billion dollars in four one K money. And I 0:08:30.240 --> 0:08:33.680 want to talk about how you guys moved into that space. 0:08:34.200 --> 0:08:38.240 But first, there's this great little story about you playing 0:08:38.480 --> 0:08:42.640 Monopoly with your wife and you decided to let's run 0:08:42.679 --> 0:08:45.320 a million simulations of Monopoly to figure out what the 0:08:45.360 --> 0:08:48.440 ideal move is for each property and what have you. 0:08:49.120 --> 0:08:53.280 Essentially high frequency trading the monopoly board, a little bit 0:08:53.280 --> 0:08:57.160 of cheating, and your wife, instead of being angry, was actually, oh, 0:08:57.200 --> 0:09:01.240 you should do something. Yeah, how did that about? So? 0:09:01.240 --> 0:09:04.440 So so Monopoly is a is a really fun game. 0:09:04.440 --> 0:09:06.440 It's mostly about trading, but but a lot of it 0:09:06.480 --> 0:09:09.480 has to do with the probability is landing on certain spaces, 0:09:10.360 --> 0:09:13.280 and so you know, it's it's a game with pretty 0:09:13.280 --> 0:09:15.920 simple rules, right, you roll the dice, you roll doubles, 0:09:15.960 --> 0:09:17.560 you go again. But if you do it three times 0:09:17.559 --> 0:09:19.520 and you go to jail and then you pull certain 0:09:19.559 --> 0:09:22.959 cards advanced to St Charles, blah blah blah blah. They're 0:09:23.040 --> 0:09:25.440 very simple rules, but it's really hard to get a 0:09:25.600 --> 0:09:28.679 distribution of the likelihood that you land on any property. 0:09:29.000 --> 0:09:30.439 And so I was like, well, look, the value of 0:09:30.440 --> 0:09:32.320 a property is going to be based on the probability 0:09:32.320 --> 0:09:35.120 that you land on it, plus the rents that you 0:09:35.120 --> 0:09:36.720 get of something if you have a house or whatever, 0:09:37.000 --> 0:09:38.360 and then you have to look at the cost of 0:09:38.400 --> 0:09:40.679 building those houses. But I just want to know what's 0:09:40.679 --> 0:09:43.400 the probability of landing on every space on on the 0:09:43.440 --> 0:09:47.079 on the on the board and turns out what computers 0:09:47.160 --> 0:09:50.400 is pretty if you have a game with simple rules, 0:09:50.480 --> 0:09:53.040 even if it's a very complex set of distributions. At 0:09:53.080 --> 0:09:55.880 the end, you just play the game millions of times 0:09:55.880 --> 0:09:57.839 and you just see like how often did you land there? 0:09:57.880 --> 0:10:00.160 So my wife didn't know I was doing in this. 0:10:00.200 --> 0:10:02.480 I had actually create a little cheat sheet and uh, 0:10:03.000 --> 0:10:04.760 I was using it to kind of assess the odds 0:10:04.800 --> 0:10:07.520 that I buy a proper trade of proper collections of properties. 0:10:07.520 --> 0:10:09.360 And it was basically just a sheet that showed the 0:10:09.400 --> 0:10:12.400 probably beloy of landing on any space. And it turns 0:10:12.440 --> 0:10:15.240 out certain spaces are way more likely to be landed 0:10:15.240 --> 0:10:17.880 on than other space. So what are the greens the oranges? 0:10:17.880 --> 0:10:19.959 What are the greens? Are bad? Greens are bad and 0:10:20.000 --> 0:10:23.120 the oranges best the best. Yeah, because people go to 0:10:23.240 --> 0:10:26.240 jail all the time, and if you play they come around. 0:10:26.559 --> 0:10:28.240 That's right, you end up in jail. You've got ten 0:10:28.280 --> 0:10:30.840 spots free parking if you play crafts what number comes 0:10:30.880 --> 0:10:33.360 up the most? Seven? Seven? Right, Well, the other two 0:10:33.360 --> 0:10:35.640 are going to be six and eight, and those are 0:10:35.640 --> 0:10:38.679 the oranges. So and that basically gets there. Going to 0:10:38.760 --> 0:10:41.959 jail a lot and rolling anything six to nine is 0:10:42.040 --> 0:10:44.800 pretty good for the oranges. So so how did that 0:10:44.840 --> 0:10:47.880 then lead to the idea of, hey, we could run 0:10:47.880 --> 0:10:52.120 analyzes and come up with the best probability for people's 0:10:52.320 --> 0:10:56.400 retirement portfolios as opposed to letting them just randomly pick 0:10:56.480 --> 0:10:59.240 whatever fun manager is hot that much. Well, so it 0:10:59.360 --> 0:11:02.000 only helped me get the job by convincing Bill Sharp 0:11:02.040 --> 0:11:05.080 I knew something about money Carlo simulation. He had been 0:11:05.120 --> 0:11:08.080 doing this for the defined benefit pension managers for a 0:11:08.080 --> 0:11:10.560 long time because they're trying to figure out on the 0:11:10.600 --> 0:11:12.840 pension side, how much do we have to fund these 0:11:12.880 --> 0:11:14.839 pensions and how should we invest to have you know, 0:11:14.880 --> 0:11:17.640 certain probability of being able to pay these pensions? When 0:11:17.640 --> 0:11:21.439 are our people all looking for the greatest return with 0:11:21.480 --> 0:11:23.120 the least amount of risk and just end up in 0:11:23.160 --> 0:11:25.240 the fat part of that car Well, so so that's 0:11:25.280 --> 0:11:27.080 kind of how you set your portfolio. But then you 0:11:27.120 --> 0:11:29.720 even have to say how much money are we likely 0:11:29.760 --> 0:11:31.920 to have thirty years from now if we invested a 0:11:31.960 --> 0:11:34.760 certain way, And that's really about simulating, well, what if 0:11:34.800 --> 0:11:36.840 the markets do well, what if they too poorly? What 0:11:36.920 --> 0:11:39.320 if interest rates are high or lower? Inflation does this 0:11:39.480 --> 0:11:41.720 or that, or you know the spread between you know, 0:11:42.000 --> 0:11:45.600 a small cap and and MidCap stocks varies. Sharp described 0:11:45.600 --> 0:11:49.160 it as a thirty variable dimensional analysis. Yeah, and so 0:11:49.200 --> 0:11:52.080 we would. So so he was already doing this for 0:11:52.280 --> 0:11:54.120 pension funds to kind of get a sense for like 0:11:54.240 --> 0:11:56.480 how much is this pension gonna be worth twenty years 0:11:56.480 --> 0:11:58.600 from now, and he wanted to do the same things 0:11:58.640 --> 0:12:00.640 for individual to answer the bay is a question like 0:12:00.720 --> 0:12:02.679 are you going to have enough money? Well, it's an 0:12:02.679 --> 0:12:04.560 easy question. It's a pretty hard answer because you don't 0:12:04.559 --> 0:12:06.679 know what the future holds. It doesn't mean you throw 0:12:06.760 --> 0:12:08.880 up your hands you say I have I have absolutely 0:12:08.920 --> 0:12:11.640 no idea. It's a little bit like predicting other things 0:12:11.679 --> 0:12:13.880 that are stochastic or uncertain, where you say, we don't 0:12:13.920 --> 0:12:16.080 have a perfect idea, but we could put a range 0:12:16.080 --> 0:12:18.000 around it. You know, if you're all in in very 0:12:18.120 --> 0:12:20.319 very vaulatile stocks, a couple of stocks, it's gonna be 0:12:20.360 --> 0:12:23.080 a very wide range that probably goes down to almost 0:12:23.160 --> 0:12:26.559 zero in a bankruptcy situation. If you're in money market 0:12:26.559 --> 0:12:28.920 funds of treasuries, it's gonna be a very tight range. 0:12:28.920 --> 0:12:31.439 And anywhere in between you're gonna have a higher sort 0:12:31.480 --> 0:12:33.880 of expected outcome, but a bigger range depending on how 0:12:33.960 --> 0:12:36.600 much risk you having that porfile. So the monopoly thing 0:12:36.679 --> 0:12:39.680 was was was useful because when Bill Sharp said, hey, 0:12:39.720 --> 0:12:41.439 you know, we're gonna be doing a lot of simulation 0:12:41.480 --> 0:12:43.560 and a lot of optimization. What do you know about that? 0:12:44.040 --> 0:12:45.560 I said, well, you have already kind of used it 0:12:45.559 --> 0:12:49.080 to my game previously in life. Although you know, my 0:12:49.080 --> 0:12:51.480 my wife didn't didn't take kindly when she found out 0:12:51.520 --> 0:12:55.760 that cheat sheet. That's that's great. So so now I'm 0:12:55.760 --> 0:12:57.920 trying to follow the path of this. So this is 0:12:57.960 --> 0:13:02.400 a free website. And then of eventually Grundfest and Johnson say, Bill, 0:13:02.440 --> 0:13:04.800 what are you doing? This is a there's a business here. 0:13:05.320 --> 0:13:09.160 You don't have to do the unpleasant. You don't have 0:13:09.160 --> 0:13:11.080 to do the firing and hiring. Let's get a guy 0:13:11.080 --> 0:13:13.040 who's never done that to do right. But here your 0:13:13.160 --> 0:13:16.360 your chairman emeritus. You're the nobel laureate. You're gonna be. 0:13:16.520 --> 0:13:18.680 We'll trot you out when we have big clients that 0:13:18.720 --> 0:13:21.559 we want to razzle dazzle, and I'm based on your 0:13:21.600 --> 0:13:25.600 client list, so you don't. Essentially, it's not like individuals 0:13:25.640 --> 0:13:28.480 come to financial engines and say take my four oh 0:13:28.480 --> 0:13:33.800 one K. It's companies like Ford and other giant employers 0:13:33.880 --> 0:13:36.640 who say, we're not gonna play this crazy game. We're 0:13:36.679 --> 0:13:40.840 just gonna do this simply and and crank uh crank 0:13:40.880 --> 0:13:43.800 out one of Bill's simulations, and we'll use that for 0:13:43.920 --> 0:13:47.200 or a couple of options for our clients. So so, 0:13:47.679 --> 0:13:49.520 but how do you get from A to B? How 0:13:49.520 --> 0:13:52.880 do you get from a free website run by a 0:13:52.960 --> 0:13:56.200 quirky Nobel laureate to all right, this is a real 0:13:56.200 --> 0:13:59.200 business with a hundred billion in assets, a public company 0:13:59.240 --> 0:14:01.760 and generating drives and millions of dollars on revenue. If 0:14:01.760 --> 0:14:04.000 I had boiled down to kind of one thing, I 0:14:04.040 --> 0:14:10.360 would say hardcore learning and iteration, which which sounds a 0:14:10.440 --> 0:14:12.520 lot like failure. And you know, if we had given up, 0:14:12.520 --> 0:14:14.080 it would have been failure. But it was kind of 0:14:14.080 --> 0:14:16.240 close to failure a lot of times. So what were 0:14:16.240 --> 0:14:18.400 the first few What what what are the first few versions 0:14:18.440 --> 0:14:20.160 of this look like? So the first thing we tried 0:14:20.200 --> 0:14:22.120 to do is and I thought it was a pretty 0:14:22.160 --> 0:14:24.600 decent idea. The Department of labor At just issues from 0:14:24.640 --> 0:14:28.440 regulations saying that if an employer hired someone who did 0:14:28.480 --> 0:14:33.080 not give specific recommendations, just asset allocation advice, it wouldn't 0:14:33.080 --> 0:14:36.080 be advice. It would stay on this fiduciary safe harbor 0:14:36.480 --> 0:14:38.920 and they could do without worried being worried that would 0:14:38.920 --> 0:14:42.920 be constituting advice. And and our original thought was, let's 0:14:42.920 --> 0:14:46.720 be an education company. Let's actually just just give education. 0:14:46.760 --> 0:14:49.000 Let's not be an advisor, let's not give advice. And 0:14:49.400 --> 0:14:51.600 what kind of sell as an employee benefit? Kind of 0:14:51.600 --> 0:14:55.440 financial literacy? And so I read up a big business plan. 0:14:55.520 --> 0:14:58.040 This is my big document. I'm excited to go raise money. 0:14:58.080 --> 0:15:00.600 I go out to walk to uh To to sand 0:15:00.680 --> 0:15:03.760 Hill Road and all the vcs and they're like, this 0:15:03.800 --> 0:15:06.080 is a stupid idea, and we're not going to fund 0:15:06.080 --> 0:15:09.840 an education company. Uh. They didn't really say what do 0:15:09.880 --> 0:15:11.400 They're just like, you know, tell me when you get 0:15:11.440 --> 0:15:14.360 a better idea. And a couple of guys at work, 0:15:14.400 --> 0:15:16.120 and there are only five of us, but two of 0:15:16.120 --> 0:15:18.520 the guys are like, yeah, this is so stupid. We 0:15:18.520 --> 0:15:21.080 shouldn't be just doing education. We should become an investment visor, 0:15:21.560 --> 0:15:24.000 because that's how you can charge of some percentage and 0:15:24.040 --> 0:15:28.080 get paid on the assets under management and surreptitiously work 0:15:28.160 --> 0:15:31.280 the education. Yes, and and and what we what we 0:15:31.360 --> 0:15:33.120 really did have a sense for And so I agree 0:15:33.120 --> 0:15:34.600 with them. I didn't want to kind of take on 0:15:34.680 --> 0:15:37.640 that headache of becoming an advisor, but the fact that 0:15:37.640 --> 0:15:39.160 the matters most people want to know what to do 0:15:39.480 --> 0:15:42.440 and kind of hey, you're getting warmer, you're getting colder. 0:15:42.520 --> 0:15:44.400 Study a little bit of this now, they're like, just 0:15:44.440 --> 0:15:47.440 tell me what I should do, what fund should I buy? 0:15:47.680 --> 0:15:49.640 What find should I sell? In order to really do 0:15:49.680 --> 0:15:51.440 a good job with that, you gotta be an investment visor. 0:15:51.600 --> 0:15:54.280 I'm Barry Rihults. You're listening to Masters in Business on 0:15:54.360 --> 0:15:57.880 Bloomberg Radio. My guest this week is co founder and 0:15:57.920 --> 0:16:03.280 former CEO Jeff Agian, called of Financial Engines. They are 0:16:03.360 --> 0:16:06.400 the largest r i A in the United States, managing 0:16:06.560 --> 0:16:09.960 over a hundred billion dollars in four oh one k money. 0:16:10.120 --> 0:16:14.320 And I've described, by the way, whenever I described financial 0:16:14.320 --> 0:16:17.120 engines to people, because so many people have never heard 0:16:17.160 --> 0:16:20.120 of you. You're not selling into the retail market. You 0:16:20.240 --> 0:16:25.280 sell essentially into corporate and institutional markets. Financial Engines, I've 0:16:25.320 --> 0:16:27.720 I've never heard of them. Well, really, they were the 0:16:27.760 --> 0:16:31.280 original robo advisor. They started doing this before one case 0:16:31.840 --> 0:16:35.480 we started, so it's almost twenty years twenty years old, 0:16:36.240 --> 0:16:40.600 and essentially you were using software and algorithms to drive 0:16:40.680 --> 0:16:44.760 investing decisions, long before all the cool kids started doing 0:16:44.800 --> 0:16:47.360 Oh yeah, I mean there was no JavaScript. I mean 0:16:47.360 --> 0:16:51.480 web servers were brand new job and didn't even exist yet, 0:16:51.840 --> 0:16:54.760 and so there was a whole different world out there. 0:16:54.880 --> 0:16:58.920 And when we first did this, you it took about 0:16:59.000 --> 0:17:04.120 fifteen minutes to download our software. Uh when Java finally 0:17:04.160 --> 0:17:06.840 came out and and people were using dial up modems. 0:17:07.000 --> 0:17:09.960 So it's kind of a problem that the technology really 0:17:10.040 --> 0:17:12.080 wasn't there yet when we were starting, not not a 0:17:12.080 --> 0:17:15.439 whole lot of graphic interface and a lot of interesting 0:17:16.040 --> 0:17:20.359 web flash before Java, before Flash before all the things 0:17:20.359 --> 0:17:23.359 we take for granted on the internet. Yeah. Yeah, So 0:17:23.760 --> 0:17:26.320 let's talk about I don't even know if I could 0:17:26.359 --> 0:17:29.359 call them your competitors, although they have talked about moving 0:17:29.359 --> 0:17:31.040 into the four O one case based. There are a 0:17:31.160 --> 0:17:34.280 dozen or so companies, the probably the two best known 0:17:34.359 --> 0:17:38.680 or wealth Fronts and Betterment. What are these other robo 0:17:38.760 --> 0:17:43.000 advisors doing right? What are they getting wrong? It's hard 0:17:43.040 --> 0:17:45.080 to say for sure. I mean, I clearly have a 0:17:45.080 --> 0:17:47.720 lot of biases because I've been in the industry for 0:17:47.760 --> 0:17:52.280 a long time, and obviously we we compete, um, but 0:17:52.320 --> 0:17:54.040 you know what, I what I think they're doing right 0:17:54.320 --> 0:17:56.720 is that they recognized a really big need, which is 0:17:56.760 --> 0:17:58.800 that more and more Americans do need help. And there's 0:17:58.840 --> 0:18:02.160 a lot of inefficiency ease, and a lot of conflicts 0:18:02.800 --> 0:18:04.439 and a lot of poor quality when it comes to 0:18:05.040 --> 0:18:07.560 individual Americans getting advice, and so I think there is 0:18:07.600 --> 0:18:11.400 a big need. I think that they are also kind 0:18:11.440 --> 0:18:14.000 of carving up different sorts of spaces. Well Front is 0:18:14.560 --> 0:18:19.080 going after kind of the the younger millennial, generally tech 0:18:19.160 --> 0:18:21.040 person who made a lot of money. They're focused a 0:18:21.040 --> 0:18:24.879 lot on tax loss harvesting, betterment, has a few different 0:18:24.920 --> 0:18:28.360 distribution channels, including going through r A s not through 0:18:28.400 --> 0:18:31.160 corporate are big thing. You know has been going through 0:18:31.200 --> 0:18:34.080 our A. So we last time and I'm not the 0:18:34.080 --> 0:18:35.880 company anymore, so I just kind of read the press 0:18:35.920 --> 0:18:37.760 releases and the earnings reports when they come out. But 0:18:38.800 --> 0:18:41.640 company now has more than a trillion dollars in four 0:18:41.760 --> 0:18:43.880 win K plans that have hired them and managing over 0:18:43.920 --> 0:18:46.240 a hundred and fifteen billion in a u M, so 0:18:47.000 --> 0:18:49.520 that that's a pretty big company. It's the largest independent 0:18:49.560 --> 0:18:52.520 area in the country and a big part of the 0:18:52.600 --> 0:18:58.879 success has been making it really easy and safe for 0:18:58.960 --> 0:19:01.159 an individual to say, yeah, I want you to be 0:19:01.280 --> 0:19:03.400 my advisor. And by going through the workplace, we get 0:19:03.400 --> 0:19:06.520 the trusted introduction from the from the company, keeps acquisition 0:19:06.560 --> 0:19:08.840 costs low and because we manage your four O OK, 0:19:09.000 --> 0:19:10.639 you don't need to sign any paperwork, you don't need 0:19:10.680 --> 0:19:12.440 to move any money, you don't need to figure any 0:19:12.480 --> 0:19:15.560 it's just like, yeah, please do this. I think without 0:19:16.240 --> 0:19:18.720 that trust to introduction and not having to move money, 0:19:18.840 --> 0:19:23.000 it gets very difficult. So I know our unit economics 0:19:23.160 --> 0:19:25.359 quite well, and they were very they were very compelling. 0:19:25.359 --> 0:19:28.239 It's a very profitable company. I think it would be 0:19:28.320 --> 0:19:34.400 really really difficult to do this without a some sort 0:19:34.440 --> 0:19:37.120 of secret sauce on the acquisition side, because acquisition costs 0:19:37.119 --> 0:19:41.399 are huge to say the least. So let's ask the 0:19:41.400 --> 0:19:44.000 flip side of of the question. So, what's the role 0:19:44.240 --> 0:19:47.760 of a live human in providing financial advice or financial 0:19:47.800 --> 0:19:52.800 planning either as an adjunct to or above and beyond 0:19:53.600 --> 0:19:57.560 the al GOO driven allocation strategy? And so so this 0:19:57.640 --> 0:19:59.560 is something that took us a long time to figure out. 0:20:00.200 --> 0:20:03.080 We started as an education software company that didn't work 0:20:03.080 --> 0:20:04.840 at all. Then we went to advice, but we the 0:20:04.880 --> 0:20:09.160 tagline was your personal online advice. But this was your 0:20:09.200 --> 0:20:11.600 personal online advisor. Our whole thing was we didn't want 0:20:11.600 --> 0:20:14.879 to have our own advisors. They cost too much. You know. 0:20:14.920 --> 0:20:17.119 We talked to customers and they said, it's great thing 0:20:17.160 --> 0:20:18.639 you're giving me a tool. I don't know how to 0:20:18.720 --> 0:20:21.520 use the tool. I think I'm gonna misuse the tool. 0:20:22.040 --> 0:20:23.680