Welcome to the sixth episode of The Fiduciary U™ Podcast. My guest today is Aaron Klein, who is co-founder and CEO of Riskalyze, one of the most popular risk alignment tools in the financial services industry, and a darling in the FinTech community. Riskalyze invented the Risk Number®, which is a quantitative methodology that helps financial advisors drive alignment between clients and their portfolios. Their mission is to empower the world to invest fearlessly.
On today's episode, Aaron and I discuss how the global pandemic has vaulted us into a "risk-first" decade, why financial advisors without a risk alignment tool in 2020 are like advisors without computers in 2000, and why using a quantitative approach to risk assessment is superior to a qualitative one. We also discuss how behavioral economics impact the way investors and retirement plan participants make decisions, and ways that tools like Riskalyze can help advisors harness that behavior for their clients, rather than trying to change it. Aaron provides insights on the opportunities and challenges that he and his team have experienced in the ERISA world versus the wealth management space. Aaron also shares his single best piece of advice for making ERISA fiduciaries smarter, which is to get risk at the heart of helping participants make investment elections, so they can be fully bought into their decisions.
And be sure to listen to the end, where Aaron shares a little about he and his wife Cacey's personal story as adoptive parents of Spencer, who was born in South Korea, and Emma and Teddy, who were both born in Ethiopia. This experience led Aaron and Cacey to co-found Hope Takes Root, which is an initiative that uses vocational training and life mentoring to change the future for orphans and at-risk kids in Ethiopia. It's a very cool, inspiring story that I really connected with, and I think you will, too.
And so, with that introduction, I hope you enjoy this episode of The Fiduciary U™ Podcast with Aaron Klein from Riskalyze.
"How do you cross the chasm of aligning what somebody feels about their money with the same kind of risk number scale on portfolios?" - Aaron Klein
"The truth is that advisors have to make the client the hero of the story." - Aaron Klein
"We have to go back to embracing wholeheartedly American individualism and letting people self-determine their values and what they want to do with their future." -Aaron Klein
"Here we are in 2020, and I really believe that this has launched a risk-first decade" - Aaron Klein
"Risk is at the center of how people are making decisions." - Aaron Klein
Josh Itzoe: Aaron Klein, welcome to The Fiduciary U™ Podcast. I'm really excited to have you on today.
Aaron Klein: Thrilled to be with you.
Josh Itzoe: What I'm so excited about today is to discuss really the behavioral finance aspect of investing, especially for retirement plan participants and Riskalyze, you guys have been just an incredible success story, really, in the FinTech space, and creating tools that I think your mission is to empower the world to invest fearlessly. So, for those listeners who may not be familiar with Riskalyze, could you give a little bit of background about who you are and what you do?
Aaron Klein: Absolutely. It's wild. We're coming up on 10 years as a company next March, so incredible to kind of look back at the last nine, and think about the journey that we've been on and thrilled to have the opportunity to serve tens of thousands of advisors today the way that we do.
The company started as a little bit of a conversation a few years before that between me and a friend of mine who was a financial advisor, and I was running products for a division of an options brokerage firm. I was watching, kind of building technology products that options traders would use to think about risk, and those options traders range from the very, very sophisticated to frankly a lot of unsophisticated options traders.
And I just remember commenting to my friend, Mike, "It is crazy how the average individual thinks about the concept of risk." And he said to me, "If you think that's crazy, you should see how many of us financial advisors think about it. We just have not really had the tools in this industry to understand who people are. We kind of don't treat people as individuals, we just talk to them, stereotype them a little bit based on age, maybe in time horizon, and then we just kind of drop into these buckets that we've labeled Conservative, Moderate, and Aggressive."
And the challenge, of course, with that is that you and I and say an asset manager could all use the word moderate, and we have no idea if the three ... if each of the three of us mean the same thing by that word. It struck the both of us as like, "This should be the equivalent of architecting contractor and person trying to build a home," are talking to each other and they're saying, "Remember, they want a moderately conservative hallway leading to their moderately aggressive bedroom." Right?
There's a reason we put feet and inches into the blueprints when we're building a home or an office, and we really believe that somebody needed to put the feet and inches into this process for financial advisors. And so, Riskalyze was born and the risk number was born. We started working on building that technology around understanding who somebody is, from a risk perspective. It's got a very deep foundation in math, and quantitative, objective approach to understanding who people are from a risk perspective.
That's based on top of the academic framework that won the Nobel prize for economics in 2002, it's called Prospect Theory. But Prospect Theory in and of itself is actually pretty ... Well, it can definitely put you to sleep. It's an academic paper, but it's also pretty ... There're some things about it that are interesting, like when Kahneman was doing the work in universities, he would use college students with relatively nominal amounts of money. Right?
"Would you like $22 now, or do you want to risk that for a chance to make $55?" Or something like that, right? So, turns out that where Prospect Theory actually starts to get useful is when you can apply real dollar amounts to it. Right? And so, that's one of the fundamental principles that we've always used with what we built, was that real dollar amounts, when people are actually looking and understanding trade-offs between risk and certainty for their actual money, that's where you start to get meaning out of this, and you can arrive at a risk number that makes sense for that individual.
I like to put it this way, Warren Buffett and I might have the same risk number, but if I did the risk number process with his amount of money, I have no idea how it would come out, because I can't really relate to billions of dollars. Right? Conversely, if he did the risk number process with my amount of money, I can guarantee you it would come out as a risk 99, because he'd look at those and say, "That's a trivial amount of money. Risk, risk, risk, risk." Right?
Josh Itzoe: Right.
Aaron Klein: And so, we really believe that that's very personal, that was one of the big breakthroughs, was figuring that out. Then, we had to build like how do you ... How do you cross the chasm of aligning what somebody feels about their money with the same risk number scale on portfolios? And once we cross that chasm and build that bridge, the idea of risk alignment was born. And that was 2013 that we rolled the product out for financial advisors.
It kind of took off like a rocket, and today we serve tens of thousands of them across the country. But what's incredible about that is here we are in 2020, and I really believe that this has launched a risk-first decade. You look at what happened with the pandemic and the big market crash back in the March and April timeframe. Yes, we've had quite the snap-back in the market since then, but frankly, that only exacerbates the trend.
Risk is at the center of how people are making decisions. We felt like that's how it should be in 2013 and '14, and '15, and '16, and so on, last decade. But, in 2020, we just see a sea change across how people are perceiving things and making decisions, and risk is at the center of that.
I mean, people are having to make risk-reward decisions about going to the grocery store, for crying out loud. Right? And so, we really believe we're in this new decade of risk that, for financial advisors, I don't know, not having a risk solution on their desk in 2020 is starting to look like not having a computer on their desk in 2000.
And I think that's really interesting. We did not predict a global pandemic in 2020, we wouldn't have wished this on anybody or the world, but I do think that it's an incredible opportunity for financial advisors, regardless of where they practice and what they focus on, because it's the risk-first decade, and clients are making decisions through a whole different lens now.
Josh Itzoe: Yeah, it's interesting, and I want to unpack a few of the things that you said there. Danny Kahneman, who you talked about, a behavioral economist, did a lot of foundational research in-
Aaron Klein: Sure.
Josh Itzoe: And along with people like Cass Sunstein and Richard Thaler, but this idea or this area of psychological research in terms of how people make decisions, if you will, and that their behavior ... What I would say is traditional economics is very, what I would call elegant, right? That people are 100% rational, and that-
Aaron Klein: Right.
Josh Itzoe: ... they always make rational decisions, whereas behavioral economics is the fact that the real world's messy, and it's messy how people make decisions. One of the things about Riskalyze, and there are lots of different risk profiling tools that have been in the industry. I've been almost in the industry 20 years, and have seen lots of different tools. Many of them are what I would consider kind of qualitative based, where it's more of trying to assess how people feel, as opposed to this quantitative ...
And I loved the way you described the contractor and the architect, and the perspective home owner, and this idea of moderately conservative hallway, if you will, as opposed to feet and inches, which is a common standard unit of measurement that everybody can agree what an inch is or what a foot is.
Aaron Klein: Yes.
Josh Itzoe: And so, maybe share a little bit, why ... When there were these other tools, what was it about the quantitative-specific nature of the risk number that you felt like made a lot of sense to you? And, why'd you take that approach, as opposed to more of the qualitative approach?
Aaron Klein: Yeah, no, I love how you articulated that. If you go back to a lot of that work by behavioral economists, it's interesting because there are some people who perceive or believe in the quantitative objective approach, as one that says people behave rationally all the time. Far from it. Actually, the quantitative objective approach, in my opinion, is the only way to actually account for the fact that people do not behave rationally all the time.
I can guarantee you that there will be plenty of financial advisors who use the Riskalyze approach, and this client, they go through the process and they're a risk 42, and the advisor is like, "Why? They've got a large income, tons of savings. There's no reason that they shouldn't be a risk 85." Right? "They've got their whole career ahead of them, they've got lots of time. It doesn't make any sense."
People are not rational beings. They feel and perceive and believe different things, and-
Josh Itzoe: Which impacts their behavior, right?
Aaron Klein: Exactly.
Josh Itzoe: Ultimately, it impacts what they do.
Aaron Klein: Exactly, exactly. And so, the challenge with the qualitative approach is that how people feel on a given day is not a very good proxy for how they're going to feel when they are under stress six months from now. Right? I mean, we can laugh about the architect contractor example, but there are some days that I feel like my house is the perfect size, and there are some days I feel like it's too small, and there are some days I feel like it's too large, and I don't want to take care of it anymore.
I just think that how people are feeling today, on a qualitative basis, does not always have a good relationship with how they're going to feel in the future, particularly if they're under stress in that future. Another way that I've heard it articulated, and I like this, is that we don't actually have a very good relationship with ourselves 30 years into the future, right?
We can't really relate to who we're going to be. I mean, I can tell you I struggle with that, sometimes three years in the future. We're going through a three-year planning process right now, here at Riskalyze, and I'm like, "That's really interesting, I don't know that I've, for a while, picked up my head and looked out three years and gone, 'I know exactly what I'm thinking,' my relationship with myself will be three years from now."
It's 2020, right? We're focused on the here and the now. So, all this to say the quantitative approach, first of all, will absolutely begin to break down past six months from now. That's one of the things we discovered in our early research, is that people could actually, if they are working with dollar amounts that are relevant to them, that are personal to them, "This is my money, and I am kind of reacting to it right now, and the idea of losing all this money or choosing certainty or risk here, this is something that's real to me because these are my dollar amounts."
I can relate to that. But honestly, if you go out further than about six months, it begins to break down, and it will at some point, I can't pinpoint when it is, but if you try to project using a quantitative approach how somebody might react to risk and certainty in their money five years from now, I don't think you'd be any better than the qualitative approach at figuring that out.
But, what we've I think consistently been able to show is that we can look at that using the quantitative approach about six months from now. We can get a really good understanding of how people are going to react to seeing those big, red numbers, and those big, green numbers in relationship with their money, and what kinds of decisions they might make on that basis.
And that, ultimately, can set them up with this framework. That's where we get to the alignment part, right? Because, we can say, "Well, based on your answers, this is kind of what I guess your biases or your instincts might be. Based on your money, six months from now, let's look at an investment portfolio that fits the same framework, because if you take a look at this, where if we plug this investment portfolio into your long-term plan, hey, you're 55 years old. You haven't saved, you're telling me you're a risk 32. Okay. We're going to have to make some other decisions." Right?
Because, we're not going to get you to your goal investing like a risk 32, so we're going to have to live on less money after retirement, we're going to have to work longer, we're going to have to make some of those different changes to kind of make the math come together here. And ultimately, what I think it does, even when people actually hit risk alignment, they go, "Okay, I'm a risk 55, and that's how I'm invested. Great."
What it really does is it builds this short-term framework that helps that investor understand and react to risk appropriately. Right? We heard this from advisor, after advisor, after advisor in March and April, that like, "Hey, you helped me build a short-term framework for my clients to understand this risk and react to it appropriate. So, even though it was a 5% probability event where things were falling below our expectations at time, we were able to look at that and go, 'Look, I get it. I understand the situation we're in, and I'm going to choose to make a good short-term decision.'"
Because ultimately, that's what this is all about. We want to take people who are making fearful short-term ... bad short-term decisions, and transform into fearless investors who make great short-term decisions, because ... I was speaking to a group of financial advisors one time, and I said, "How many of you help your clients make great long-term decisions?"
And all the hands raised in the room, and I said, "I'm sorry, it's a trick question. None of your clients make long-term decisions. They only make short-term decisions. You're responsible for turning their short-term decisions into long-term financial outcomes." So, if we can get the technology to help you with that framework to transform their short-term decisions from bad to good, that's where financial advisors shine, because they turn great short-term decisions into amazing long-term financial outcomes.
Josh Itzoe: Yeah. There's so, so much awesome stuff that you just covered right there. I think that study, or one of the studies you were referencing, I actually write about it in my latest book, The Fiduciary Formula, it was a study by a guy named Hal Hershfield, and he had done research with groups of people and used a digital avatar to help them see ... to age themselves to like age 70, and then ask them what they would do with money. And there's really fascinating research.
One of the things that came out of it was that ... Exactly what you said, is that people have a very hard time, I can think about what my life is going to look like six months from now, but 25 years from now, there's so much noise, it's so fuzzy. What he found in his research was when he gave people a framework, word that you used, right? Where he digitally aged what they would look like so they would see a representation of themselves at 70, they were much more likely to save more money, because they felt connected to their future self.
Aaron Klein: That's interesting.
Josh Itzoe: He called it their current self versus their future self, and he said that when people are disconnected from their future self, it's very hard for them to make long-term decisions. And it's interesting, you guys have this very ... this tool that's really meant, like you said, it's kind of six-month intervals. There's a really interesting book you might've read called Atomic Habits, by a guy named James Clear.
Aaron Klein: Yeah.
Josh Itzoe: One of the things he talks about in that book is this idea that kind of small, short-term decisions, these decisions that we make every day kind of turn into habits, and they're like the compound interest of our behaviors over time. Right? It's these small choices that we make every day. Am I going to exercise? Am I going to eat right? Am I going to save less than I earn today? And it's those little, incremental, short-term steps that build the right behaviors over time.
And I've always sensed that Riskalyze, in some ways, is a tool to not solve people's behavioral challenges, but in some ways harness the power of their behavior, which is really what the ERISA world has gotten right in a lot of ways around behavioral finance. And I actually think the ERISA space, the 401(k) industry is ahead of the private client retail wealth management industry around harnessing behavioral finance.
It's not really about necessarily changing people's behavior, because that's really, really hard. What it's about is really framing and shaping their behaviors, and so many great things that you talked about-
Aaron Klein: I love how you said that, and I love that word. I've used that word before, because there's a talk that I give about confirmation bias. It's the mother of all biases, right?
Josh Itzoe: Right.
Aaron Klein: And I will say, I think that in the first year of our existence as a company, we had the naïve belief that we could defeat confirmation bias. Right?
Josh Itzoe: And just really quickly, so confirmation bias being the idea that ... Just for listeners who may not have heard of that term before, it's really the idea that we seek out and overweight information that aligns with the beliefs that we have, and we underestimate the validity, if you will, of information that contradicts what we believe.
Aaron Klein: Absolutely.
Josh Itzoe: So, we're much more prone to believe things that confirm what we believe, than go against what we believe.
Aaron Klein: Yeah, for sure. And it's one of those things that a very easy belief is when we see the CNBC screen filled with red, and we're like, "The market is going down. I need to sell. Red equals bad." Right? And green, "The market is up, I need to buy, because green equals good." Right?
So, it's one of the most baseline responses to kind of ... Of course, confirmation bias can get far more sophisticated than that, but that's a very simple version of it. And I would say that we had this naïve belief that we could somehow defeat it, and over time, a year or two, when we realized that what we were actually building was a way to harness it, because if you could get the investor to agree that it would be normal behavior for their portfolio 95% of the time to end up somewhere between the red number and green number here six months from today, the very common thing that advisors tell us is that before they can implement the Riskalyze process they get a phone call from the client.
They're like, "My portfolio is down 3%. Am I okay?" Okay? Now, they're not actually yelling at the advisor to sell, okay? But they're kind of telling them like, "Hey, are we going to be ... I'm not sure I trust this." Right?
Josh Itzoe: Right.
Aaron Klein: And the advisors point out that once they normalize what normal behavior is for a client's portfolio, number one, the client makes far fewer of those phone calls. Sometimes they just want to hear the advisor's reassurance, but they make far fewer of those phone calls because they understand that down 8% is normal behavior for this portfolio in a six-month timeframe.
But the other thing that happens is it harnesses confirmation bias, because they were part of the decision-making process to put the money into a portfolio with that kind of normal behavior, so they're able to say, "Okay, we're down 6%. I was right." Right? Like, "This is normal behavior for this portfolio. I was right. The right decision is to stay the course."
Or, "I was up ... We're up 10%. I was right." Right? Like, "This is normal behavior for this portfolio. The right decision is to stay the course." And at the end of the day, harnessing confirmation bias turned out to be not only the achievable thing, but also I would argue the better thing, because we're just hardwired with this. Right? And to make it work for you, instead of be something that we're just constantly trying to defeat, I think turned out to be a much more valuable path.
Josh Itzoe: Yeah, that's a fascinating ... In some ways, I view it as a ... I love the idea of getting investors, clients to buy in, to be part of that, to be part of that decision. I have four kids between the ages of six and 14, and-
Aaron Klein: That's awesome.
Josh Itzoe: When they're really young, you can essentially force your kids to do what you want them to do. You can make the decisions for them. What I'm finding, especially with my 14 and my 12-year-old right now is I need them to ... It's less about telling them what to do, and making them do what I want them to do, and it's more about helping give them a framework, so that they can kind of come to agreement that a course of action is the right course of action, and kind of-
Aaron Klein: It's a lot easier if you can get them to buy in and make it their idea, instead of just your idea all the time-
Josh Itzoe: Absolutely. It's a lot more time consuming to try to get them to buy in, but what's interesting, and we actually have this philosophy, to be honest with you, in the ERISA space. One of the important things of good governance is to take meeting minutes, and since we really began, we take very detailed meeting minutes every time we meet with a retirement planning committee.
Aaron Klein: Yeah.
Josh Itzoe: And part of the reason why ... So, there are two elements. There's taking minutes, and then there's spending a lot of time educating our clients, not just about what we think they should do, but the why behind it, because I've always found that so often we make decisions, and time goes on, and a lot of decisions don't turn out the way we expect them to, and it's easy to go back and to start to question, "Well, why are we here?"
And you wind up some place because of the decisions that you made, and what minutes do is it allows us to go back and to revisit, especially if we've forgotten, why we made the decisions we did. It provides us that context and that framework to go back and say, "Oh, that's right. We had these assumptions that ultimately led to these decisions."
Aaron Klein: That's a great point.
Josh Itzoe: But the other one is that clients then own the decision-making process, as well, and it's not so much like, "Why did you do this?" It's more of, "Oh, I understand why we did this."
Aaron Klein: It's interesting, because it ties in with something we ... I did a talk on this year about the concept of storytelling. I'll talk about this very, very quickly here, but the concept is basically that every story, every great movie we watch, every great book we read has roughly the same architecture, which is really interesting. Right?
And effectively, what it means is there's a hero in the story, right? And they're facing some kind of problem or challenge, and typically, a guide comes along and helps them through that problem and challenge, and gets them to the other side, and if it's a story with a happy ending, it gets them to success and they achieve whatever success looks like.
You can look at that framework and it just applies to so many different movies, films, books, et cetera. We'll use Star Wars as an example, right? Luke Skywalker comes on the scene, he's got a pretty big problem that he's got to deal with, Obi-Wan Kenobi appears as the guide, and here's the really interesting thing.
Advisors, because they're doing such heroic work, often make themselves the hero of the story. And the truth is, is that despite the actually heroic work the financial advisors do to help get people to the other side, the truth is, is that the advisors have to make the client the hero of the story, because they're the guide. They're the one there to help the client-
Josh Itzoe: They're Obi-Wan, they're not Luke.
Aaron Klein: They're Obi-Wan, they're not Luke. Right?
Josh Itzoe: That's a great point.
Aaron Klein: What's fascinating is that if you don't do that, if you make the client ... or if you make yourself the hero of the story, what does that make your client? I'll tell you what, it makes your client a spectator. They're sitting on the couch eating popcorn, watching your movie. Okay? And that means that they're not involved in the story, and that's a very transactional relationship. Right?
Josh Itzoe: Right.
Aaron Klein: And best of luck getting the client to take some level of responsibility for their input and decisions, because they're just a spectator eating popcorn. That's why it's so important to remember to step back and be the guide, and make sure the client understands that they're the hero of the story.
Josh Itzoe: I think that's a great point. That's a great point. In a lot of ways, I think people just naturally, especially longer-term decisions, there's so much pressure to make the right decision, or to make the perfect decision, and I think in a lot of ways, that's just a ... That's a utopian idea, that we can perfect decisions-
Aaron Klein: Yeah, I love that-
Josh Itzoe: But that's not the real world, and we're going to make ... The goal isn't to make perfect decisions. Right? I think the goal is to make consistently good decisions, and then recognize quickly enough when you've made a bad one, and pivot and course-correct. And it seems like Riskalyze, in a lot of ways.
And so, stepping back, there's all this pressure, and a lot of times we don't give ourselves permission to make choices or mistakes, because of all that pressure. And it seems like in some ways Riskalyze, when you help people understand what their risk number is, and maybe their risk number is actually higher than what they thought it was, in some ways that investing fearlessly is empowering them or giving them permission to invest in a certain way.
Or, maybe their risk number is lower than they thought it was, and maybe it's giving them permission. Do you see that? Do you see in those short-term periods this permission is helpful in getting people to own their decisions?
Aaron Klein: For sure. And I think it looks a lot of different ways. One of the things that advisors will say is a client who is invested with a lot more risk than they want to realize will walk in and say things like, "Yeah, my portfolio just keeps bouncing around. I don't really understand. It just feels like it's bouncing around a lot." Right?
And almost inevitably, that kind of client will be a risk 42, and their portfolio is at best ... it'd be like a risk 85. Right? And when they see that, they're kind of like, "I get it. I want to drive 42 miles an hour, and my portfolio is driving 85 miles an hour, and that just doesn't feel comfortable to me."
Again, a lot of advisors will look at that and say, "Well, what if I don't think that the right decision is for the client to drive 42?" Well, that's great, we now have a communication framework to talk with the client about this and say, "So here's the deal, we can drive your portfolio at 42. Okay? But here are the decisions we're going to have to make if we want to make that choice." Right?
Josh Itzoe: And the trade-offs that may be involved in that. Right?
Aaron Klein: Exactly. The trade-offs, because we can get from L.A. to New York in six hours or 30 years, there's a lot of different ways we can go. Right? It used to take 30 years in covered wagons, you'd be a whole different generation of people by the time you got there. Right? But we can do this a lot of different ways.
But, what we have to do is figure out the trade-offs and figure out what you're comfortable with. And I hear from a lot of advisors who say, "We got the client comfortable with investing up in the 80s, like we think they should, and we got them bought into the idea that they're going to have to accept as normal a greater level of risk in the portfolio than they ... their instincts would lead them to feel comfortable with."
There are other advisors who say, "You know what? I couldn't get them comfortable with that. At the end of the day, they said, 'I'm just not comfortable with that much risk in the portfolio.' So, we looked at the trade-offs and we had them retire later, we had them save more, different things that they could do to make the math work."
And sometimes you end up meeting in the middle. Sometimes you end up saying, "Well, what if we could get you comfortable with this much risk, and we invest you like a 60?" Okay? And you're still going to have to make some trade-offs to make that work. At the end of the day, that is the art of being a great financial advisor, and helping your client bring these different trade-offs together, and make the right short-term decisions that you can turn into those long-term financial outcomes.
And that's why, candidly, we are a long time away from any robo having the human empathy and communication skills and ability to get people to make decisions, from any robo being able to replace a human advisor. We're a long, long ways away from that. I am very bullish on the future of the human advisor because of that.
Josh Itzoe: It's interesting, and I hadn't thought about this until we ... One of the things I love about this podcast is getting a chance to speak with really bright, articulate folks, but it's the learnings-
Aaron Klein: And me.
Josh Itzoe: ... quite frankly.
Aaron Klein: And me.
Josh Itzoe: And you, as well. And you, as well. Yeah, it's all about the company you keep.
Aaron Klein: There you go, there you go.
Josh Itzoe: But it's the learnings that come out of it, and I had always thought of Riskalyze as more of an investing tool, but what you're just describing is that it's more of a planning tool. Right? It's an investing-focused tool that paves the way, used appropriately, for planning discussions. Those things about trade-offs, it's interesting.
Aaron Klein: I absolutely think that's right. And I would tell you, we work in close partnership with ... We would never try to pair ourselves as a comprehensive financial planning tool. We work in close partnership with those tools to drive data into those tools and make the financial planning process.
Josh Itzoe: So, part of the financial planning tech stack, if you will.
Aaron Klein: Yeah, yeah, for sure. But I think that the reality is that there are a lot of clients who have not reached the sophistication level or frankly financial advisors who don't have the buy-in to do that level of comprehensive financial planning. And we'd look at that and say, "There is a great opportunity to make sure that people actually address the trade-offs, even if they address them at a relatively basic level. That's like 80% of the battle compared to not addressing them at all." Right?
Josh Itzoe: Right.
Aaron Klein: And so, is there value in taking clients to the next level of comprehensive planning? You bet there is, and that's why we built great integrations with a lot of these comprehensive financial planning tools, like eMoney, and MoneyGuide, and RightCapital, and others. Right?
But, there is a lot of opportunity in getting people to do the trade-off discussion, and I think we drive more of the trade-offs discussions, and frankly, we're a rising tide for financial planning, because we actually get more financial advisors and more clients into the trade-off discussion than has happened before.
Josh Itzoe: Right. Yeah, no, I think that's exactly right. And that's an interesting, even for me, in thinking about this ... Even an interesting way to think, to understand how Riskalyze fits into, like you said, more of that ... At the end of the day, advisors, I would argue, are kind of ... They're the craftspeople, and it's the tools. Right?
You can have a Riskalyze, and you mentioned RightCapital, or eMoney or MoneyGuide Pro, right, are tools. Now, tools, in the hands of a do-it-yourselfer who is trying to build him or herself a house, you can have the best tools in the world and that house may not-
Aaron Klein: Right. You can give me the best tools in the world, and I cannot build a house.
Josh Itzoe: Right. But the right tools, the best tools in the hands of a craftsman, it's going to yield—
Aaron Klein: My brother-in-law is—
Josh Itzoe: ... an incredible result.
Aaron Klein: ... contractor. He is a craftsman. Right?
Josh Itzoe: Right.
Aaron Klein: And what's fascinating is that you could hand me the most expensive set of tools that exist. I cannot build a house. Now, you could hand him a very cheap set of tools and a very expensive, premium set of tools, and he would tell you, you can build a house with either one. But he can build the house three times as fast, and at a 10X level of quality with the right set of tools. And I think that's a really great analogy, because advisors ... It's been shown over and over again. Advisors who invest in their tools and their tech stack are advisors who succeed, and deliver better outcomes for their clients.
Josh Itzoe: Right, right.
Aaron Klein: Yeah, for sure.
Josh Itzoe: I want to get into that a little bit later, because that is ... A lot of the FinTech, a lot of the investment in the FinTech space, a lot of the tools, and I've talked about this on other episodes, but the private ... A lot of the investment has gone into the traditional retail wealth management side, from a FinTech perspective, and much less in the ERISA space. So, we'll get to that question in a couple of minutes. But before we get there, you've been around roughly a decade, right?
Aaron Klein: Yeah.
Josh Itzoe: Somewhere around a decade or so. And it has obviously been a pretty incredible time for the markets, especially US markets, and I think what I found after doing this for almost 20 years is that investors typically, their risk appetite increases when markets are good, and it decreases when markets are bad. It's the analogy that you used about your house, that on some days you feel like it's ... It's like Goldilocks, sometimes it's too big, sometimes it's too small, sometimes it's just right.
Aaron Klein: Yeah.
Josh Itzoe: And just the challenge, behaviorally speaking, that people ... There's the fear of missing out, and markets go up, and people tend to sabotage themselves by making bad decisions. We've been in a time, as you've been in existence, where markets have really been going ... have been going up.
Aaron Klein: Yep.
Josh Itzoe: But, earlier this year, with the pandemic, we saw things kind of come to a screeching halt. I'm really interested. What did you see across your business? It seems like that is like a great stress-testing case that maybe you hadn't encountered as a business up until that point. What did you find? What did you find with your advisor partners? What did you find with clients during that downturn?
Aaron Klein: Yeah, great question. First of all, one of the things that we're somewhat, I don't know, mitigated from or protected from with that change in risk appetite is that quantitative approach. Right? Because, what's fascinating is that when we are talking about your money, and we're talking about chunks of your money disappearing versus the certainty of a lesser gain, or the certainty of a small gain, or something like that. Right?
And you're making those trade-offs thinking about where you might be if you make this risk choice or this certainty choice, it tends to kind of ... It drowns out the excitement of an increased risk appetite by watching Tesla go up 18%, or Apple double over the course of-
Josh Itzoe: In a day.
Aaron Klein: Right? Exactly, yeah. Exactly. And so, all of that excitement and the risk appetites increasing does kind of come back to earth when I look at it through the lens of my money, and I'm thinking about this money disappearing and going poof. Right? It brings it a little bit back down to earth, and it calms that down.
Not to say that we don't see euphoria sometimes in the data, we don't see pessimism sometimes in the data. We see that more in more of the qualitative checks that we do with our check-ins feature. Right? Where we're saying, "How are you feeling about the markets?"
Josh Itzoe: What is that? Just for listeners, what is that check-ins feature?
Aaron Klein: That's the idea that advisors want to find a way to keep their finger on the pulse beat of their client's psychology between reviews. Right? A lot of them send out check-ins now monthly, and they just ... Look, if it comes back red, they're going to reach out to that client and touch base with them, and figure out what they're nervous about, and make sure that they're feeling good, so that we're not getting worse and worse and more and more stressed throughout that period of time.
And then, we get the client review, and it's like, "Dude, we got to sell. We got to get out." Okay? So it's really interesting to watch. Those questions very much kind of track with the markets, and you could watch people. And again, what's fascinating about that is thousands and thousands of data points, really, we've delivered well over five million risk numbers at this stage.
I haven't looked at it in a while, but tens of thousands of data points this year. Right? And at the end of the day what's fascinating about it is that all these different people contributing all these different data throughout this year, and the perception that people have towards the markets is almost tracing the S&P 500, it's fascinating.
And so, all that said, the confidence that people have in the markets, we see risk numbers being a lot more stable because they're based on that quantitative objective approach. So from that perspective, risk numbers have been pretty stable, clients have been pretty stable, that's what our advisors report to us.
Now, is everybody a little bit more anxious? Is everybody a little bit more concerned? You bet. Do we have-
Josh Itzoe: And that might be that risk-first decade that you're talking about that this is, right?
Aaron Klein: Exactly. Exactly right. And do we have a communication framework to help people understand and react to this appropriate? Yes, we do, so we're prepared for that. What we've certainly seen in our business, and this is something that was interesting, we had a ton of financial advisors who were struggling in the early days of the pandemic because, for crying out loud, they're paid based on assets, and assets are down dramatically.
So, it hadn't quite hit their cashflow, but they were modeling that, and they were looking at that and going, "Man, this is a real problem." We had some firms that maybe they were bill-in-advance firms, I don't really know, but we had some firms, relatively small number totally speaking, but some firms that were really in severe financial distress.
Always tough. We tried to find ways to help those firms and just kind of help them through this, and we figure we'd rather have friends out there that can be long-term customers than to have temporary customers who will no longer be friends. And so, we did our best to try to help advisors in that situation.
Fortunately, with the market snap-back, I think most advisors saw their economics kind of return and have pretty mild to no symptoms at all in terms of their own revenue as a firm. What was interesting for us is that we saw ... We saw certainly a slow-down in advisors jumping aboard, because advisors were really busy.
They're pretty busy. We actually didn't go a single business day, including Black Thursday, that we didn't have at least one new advisor join Riskalyze, which was kind of cool from our perspective. And we've seen a big uptick in terms of ... I think it's the inflection point of the risk-first decade of advisors saying, "I got to put a risk solution on my desk in 2020. This is not something I can be without."
But what we did immediately see in March and April was our ... We naturally have some advisors cancel every given month. We lose advisors to God, and golf. We lose advisors to other reasons, as well. Changes in their business, changes in their business model, things like that. What was fascinating is that that cancellation rate plummeted in March and it has stayed low.
And again, I don't know what to say about that beyond obviously advisors realized this was a tool they needed in their toolbox to be able to talk about risk with their clients, in this risk-first decade, and we continue to see that. So, it's always been interesting. I've talked to a number of people who've said, "Well, you've never really been able to stress test your business in a bad market."
I'm like, "It's true. We see pockets of volatility. Our phones usually ring off the hook because advisors need a better way to talk about risk with their clients, but we haven't really seen the bare market." So, we saw one, and all in all, knock on wood, our business performed well through it. I think we work on behalf of great financial advisors who performed well in their businesses through it, and frankly were heroes in what they accomplished for their clients through it, and I think that's why.
Josh Itzoe: Got it. Generally speaking, like most businesses, I mean, we work with a lot of companies around the country, and during that time, not to say the 401(k) plan was not important, but in level priority, most companies were focused on, "How do I keep the doors open? How do I keep my business afloat?" And I think that's probably your point, is you would expect that in a bad economic time for advisory firms, potentially, they'd be looking to, "What are the things that we can cut from the PNL?" And it sounds like not only, perhaps Riskalyze became the perception of even a more essential tool in the toolbox, as one that was at risk.
Let's talk a little bit about just the retirement, the 401(k), 403(b), the ERISA space. I think Riskalyze, probably your focus historically has been more on that, call it individual, independent advisor. This podcast is obviously focused on retirement plan decision makers, and retirement industry professionals, advisors included.
And so, how does Riskalyze think about the defined contributions space? And what do you envision or how do you see ... What are some of the steps or approaches you've taken maybe in the past on how Riskalyze can kind of slot into that tech stack in the ERISA space, and where do you see that going moving forward?
Aaron Klein: That's a great question. We've done a few different things, and I think our thinking continues to evolve there. For one thing, we've got a lot of advisors that used the retirement plans feature inside Riskalyze, and that effectively allows them to set up a plan with a list of participants, with a set of models particular to that plan, right? Based off a fund, and based off of models that might be even managed account models that might be available in that plan, and really, kind of deliver the risk number at scale to a large number of plan participants in that plan.
When we built that, we basically had a lot of advisors who were very manually sending out individual risk questionnaires to plan participants, and then very manually creating that follow-through of like, "Here's the model that will best fit you from the menu available in the plan." So, we wanted to kind of automate that, make that easier for a financial advisor to do.
What we found was really interesting. First of all, we've got a lot of advisors who specialize in advising retirement plans, and the feedback there was, "Hey, this is a great tool. Love using it. Obviously, a great next step would be ... Man, wouldn't it be great if this was actually built in at the record keeper level? Because, I'd like to have the client, the participant actually re-checking their risk number on a six-month to a year-long basis, remind them to do that. I'd like to have them, when they're in there doing their elections, just to be able to see the risk number of what matches up with them, and maybe point them to the model that's closest to them. It'd be just a lot more seamless if that was baked in at the record keeper level." So, that was great feedback from them.
Then, we had a lot of other advisors who are not the formal advisor on a retirement plan, but they advise a lot of plan participants. And particularly in cities where there might be a large population of employees under a particular plan like here, near us, for example, there's a huge Intel office. Right?
You could be located in Redmond, Washington, and have a Microsoft employee on every corner. Really good example of how you might have advisors who are not advising the plan, but advising a lot of participants in the plan. And so, the feedback from those advisors was interesting. A lot of them were very nervous certainly to build a model out of the fund menu, for example, because they're not the 3(38) or the 3(21) fiduciary on that plan, and they're kind of nervous about engaging in that.
I have to say, rightly so, if ERISA ... One of its great challenges, frankly, is that it is a decades-old law that we've a lot of interpretation and a lot of ... And frankly, a lot of the pieces of ERISA are very, very tough for a casual advisor trying to touch 401(k) plans to tackle. It's complicated. The rules are very different, and I think advantage to the specialist firms that really focus on that, like yours, like a number of others. Right?
And so, for those advisors, the feedback on the retirement plans feature was, "Wow, this is awesome if there's a 3(38) or a 3(21) on the plan who is provided models, and then I can put those in to let the participant choose from, but I kind of feel like I need to get real and actually advise plans if I'm going to really get into this."
So, it was interesting, that led us in 2017 to say, "Well, it would be great if we could provide that kind of solution at the plan level, and allow advisors to kind of leverage a full stack technology solution to serve plans." And so, we partnered at that stage with Vestwell. And Aaron Schumm, great entrepreneur, I know you've had him on the show, and I think the world of him.
That partnership has not been one that's been wildly successful. Couple of different reasons for that. When we launched that together three years ago, I think we looked at that and said, "Wow, this is a great way to get any financial advisor to come back in and advise 401(k) plans again." And I think we look at that in hindsight now and say, "Really challenging to get advisors to want to apply themselves to that."
I think it is a field of specialization, so you have to be really committed to it. If you're really committed to it, frankly, most of those advisors already have a set of retirement plans that they're already serving, and moving them on to a different platform is not always an easy thing to do, a desirable thing to do. And I think also that part of the challenge was that Vestwell's business was growing tremendously over in the ... kind of packaged in with HR benefits products, and just big distribution across different networks.
So, individual advisors coming in who weren't really optimized for serving retirement plans in the first place were not the first priority there. It's grown, it's done okay, but it's ... As we look to the future, it's interesting, I think we see a future where we do more partnerships and more integrations across record keepers. We're in the early stages of thinking about how we can partner with a lot of those record keepers.
We've got talks going with a number of the bigger ones to say, "I think there are some ways that we could build the risk number into those record keeping platforms." We got to do that in a way where the value obviously is flowing to the plan sponsors and plan participants. So, we can't just layer cost onto the record keepers, we can't just layer costs onto the advisor. The value needs to be captured and earned by us, but it's probably flowing through from plan sponsors and plan participants in that way.
But something that is additive to the record keeper, additive to the advisor, and the advisor can get the benefits of the behavioral tools for their participants by convincing their plan's sponsor, "Hey, this is well worth it. Let's flip this on at the plan level, and let's provide the risk number technology to participants." There's a lot of excitement about that.
We're still very early in that strategy and in conversations. I think Vestwell will be one of those, and all of their other plans that have come on board, all in a million different ways, will have the opportunity to get the risk number there, rather than just folks who have come into our joint product together. So, I think that's an exciting future to think about.
Josh Itzoe: In thinking about ... It's interesting, on the ... My third episode was with Michael Kitces, who you probably know, who's-
Aaron Klein: Sure.
Josh Itzoe: ... kind of the experts' expert, and kind of the focus of that episode was delivering employee financial wellness at scale. And this idea of retirement plan advisors, one of the challenges is that planning hasn't made its way to the mass market, and there's a whole host of reasons why, that mostly really good, capable financial planners, probably a lot of the ones that are Riskalyze customers, typically, the economics of that industry, an industry that we're in as well, is that it's built around kind of an AUM model.
And you need to have people who have assets, that can afford to hire advisors that are really good and heroic, as you described them, but also, are using really, really good tools, right? Like your brother-in-law. Right?
Aaron Klein: Yeah, there you go.
Josh Itzoe: Who is saying like, "If you give me the best tools, I can be much more efficient, much more effective at what I do." The challenge is that that's a very small percentage of the American population that can afford to hire, quite frankly, firms like Greenspring Advisors or the other advisor partners that you work with.
Aaron Klein: Sure.
Josh Itzoe: One of the interesting things, I just think about our own business is that we've got north of 50,000 participants across our client base, and so there's certainly the record-keeper component, and there's a big ... There's an arms race right now, you've got record keepers that are in an arms race to try to really deliver wellness, right, to participants. That's why I think you see the Empowers recently paying a really large sum of money for like a Personal Capital all in.
Aaron Klein: Yeah.
Josh Itzoe: And you've got every provider who's trying to get in the wellness game. You've got advisors that are trying to get into the wellness game and that scale. And potentially, delivering planning to those masses. And I think, as an industry, we need to figure out, "How do we deliver financial planning at scale to more people?" And that's going to require, I think, a different probably economic model.
But it seems to me that Riskalyze is a great tool that potentially can really help retirement plan advisors, especially those who are working in providing wellness, or participant advice and whatnot. And maybe some of these listeners who haven't heard of Riskalyze, or maybe not familiar with you that are listening today, hopefully, I'd encourage them to chat and to check out what you guys are doing to really improve those interactions that they're having with participants at the advice level.
Aaron Klein: Thank you for that. And for sure, I think that at the end of the day, the challenge for a great 401(k) advisor is that you've kind of got ... Your work is multiplied, right? Because, of the number of participants in a plan. I look at, we have a 401(k) plan here, we have a fantastic advisor who advises that plan, and then provides coaching and advice and counsel to any of our employees who want to get into that.
I find it fascinating. On the one hand, the number of employees who don't engage with that advice. Right?
Josh Itzoe: Right.
Aaron Klein: I'm like, "I really don't think you understand the value of what I'm paying for, for you right now." Because we don't charge them for it, we cover it all as an employer. I'm thrilled to see the line of people going into that conference room to meet with that advisor when they come on site, and engaging with the advisor in other ways, at other times.
Because for me, it's just great to watch people who may not yet have those assets that allow them to hire an advisor, to be able to get access to that kind of wisdom, and financial literacy to make good decisions to be in a position to hire that advisor down the road. Right? For other reasons, so I think that's great. What I think is really fascinating is ... The other thing I would say is that I'm also stunned by how many of our employees, that we're at like an 86% participation rate.
And at our last employee all-hands, I was just like, "Hey, listen, I got to bring this up. We should be well up into the 90s. We should be 95% plus. I mean, for crying out loud, we are empowering the world to invest fearlessly, and we should have 95% of our employees doing the same. So, my challenge to you is, why do you not like free money? And we do 4% fully-vested, no-strings-attached match, so literally we're in this pandemic, you can't go do cool things. You've got all this extra money. For crying out loud, elect at least 1% of your paychecks, so that we can give you extra free money."
And it's fascinating, it's a fascinating challenge, the 401(k) advisors to have to drive that right ... that correct behavior.
Josh Itzoe: Well, and that ultimately, it's interesting, that's a whole different topic, and I write a lot about that in The Fiduciary Formula. We're big believers in behavioral economics, behavioral finance, and I think that is quite frankly, I mentioned it a little bit earlier, I think that's an area where the 401(k) space has really leaped ...
We've got more rudimentary tools FinTech-wise, I think, than the private client world does, but harnessing things like automatic enrollment, automatic escalation, default investing in target date funds, which ... as well. But it's all behavior, and so a lot of times I think plan sponsors think that, "Well, we just need to educate people."
People don't have a knowledge gap, they have a behavior gap. And the way that you overcome that behavior gap ... Right? The way you overcome that behavior is-
Aaron Klein: I mean, look-
Josh Itzoe: It's engineering the plan the right way.
Aaron Klein: Totally. And how simple is it to understand? It doesn't require a lot of education to say, "I would like to be paid more or less by my employer." Right? It doesn't require a lot of education to go, "I think more is better." But it does require a difference in behavior to say, "I'm going to be willing to take literally 1% less money, not even in my take-home, because taxes make that even lower impact."
Josh Itzoe: Right.
Aaron Klein: Right. "I'm going to take 1% less money in my gross paycheck today to get 2% in that account and growing tax free. That is one of the most powerful compounding tools for my future that I could ever make." And yet, somehow, even at the company empowering people to invest fearlessly with no vesting restrictions, we've got 14% of people not taking the free money.
Josh Itzoe: Yeah.
Aaron Klein: So, I'm at the level, I'm going to be writing personal notes to everybody who has not participated, and seeing if I can't get that across, because you're right. It's a behavior change, it's not necessarily-
Josh Itzoe: So, I'm going to give you a free piece of advice right now.
Aaron Klein: Okay, great.
Josh Itzoe: Don't do the notes, and here's what you do.
Aaron Klein: Okay.
Josh Itzoe: Do a re-enrollment, everybody not participating, all 14%, and I would say even the 86%, anybody ... So, anybody not participating automatically enroll off ... Do it retroactively, anybody not participating, 14%, automatically enroll them on a certain date, call it January 1, into the plan.
Aaron Klein: Got it.
Josh Itzoe: You're going to get a little bit of leakage, but I bet that number goes from 86% to north of 95%. And then, I would tell you, anybody saving below your default, I would say anywhere below 6%, but certainly 4%, automatically bump them up unless they opt out. Save the notes-
Aaron Klein: Love it. That's great.
Josh Itzoe: ... because that's not going to change it, but if you do that, that'll-
Aaron Klein: That's great. I like it. That's fantastic.
Josh Itzoe: That'll go a long way.
Aaron Klein: I'm going to do it.
Josh Itzoe: And remind people. I appreciate it, good. And let me know how it turns out.
Aaron Klein: You're welcome.
Josh Itzoe: And remind people that it's easy to invest fearlessly when you get 100% return on your money, and so if they put in 4%, they're automatically getting 100% return on their money.
Aaron Klein: That's right. I love it. That's great.
Josh Itzoe: Let's talk a little bit about, as we start to kind of wrap up, just what do you think the delivery of retirement investment advice, how do you think it's going to change and evolve over the next five to 10 years?
Aaron Klein: That's a really great question. First of all, it's obviously had to change dramatically here in 2020, right? Because, I think advisors are now coming on site, in most companies. Right? So, all of a sudden, we've got the Zoom conference room that people can join and talk through with the advisor. That, in theory, may ... Who knows what the impact of that is going to be? Is it going to be a really positive impact because we can impact more people and it's more flexible? Maybe even feels a little bit more private. Or, is that a negative impact because the quality of the interaction isn't as good? I think it's too early to tell. It's hard to say.
I think broadly speaking, it's very clear that we are in a retirement crisis in this country. Right? We've got to help people ... On the one hand, I'm very much an individualist, I believe that people should have the right to make decisions for themselves. But I also am a behavioralist, as we were just talking about, right? And the power of defaults, and the power of automatic behavior unless you opt out, to me, we've got to get that right.
And I look at that and I just go, "We've got to make a profound shift over the next decade or so." You look at the math behind social security trying to keep up and some of these other challenges, there's no greater legal creator of wealth in the markets, and we simply need to get people engaged in it. And our politics are tough right now, everything is a political football, there are elections it feels like every other day.
I know that they are actually longer than that, but boy, does it feel like it. And everything is a political issue, everything is about the next election, so everything is about scaring people into voting for you because of the disaster that's going to occur if we take the other approach. I don't have a silver bullet of what that solution is, but I do think that if we think five to 10 years in the future, we have to be in a world where it is a ton easier for employers to set up retirement plans for their employees.
Those plans should be way more portable, they should be really tied to the employee and not the employer, if at all possible. I'd like to think that 10 years from now we get to a place where the employers can really easily kind of plug into an employee's retirement account and simply ... They may have a uniform approach to funding benefits out, but the employee has something that is portable, that goes with them, that belongs to them, and that they can make decisions on how to invest those benefits.
That, to me, just makes a lot of sense, but there's a lot of changes that are going to be necessary for that kind of future to exist. And to be quite candid, without getting too political, this is not really a partisan statement, as much as to say our political system today is engineered right now for stasis, for not having big changes.
If you look at this, we haven't admitted a state to the Union in decades, and it's primarily because we're worried about the balance of power of two new senators being created, and what does that do for partisan politics on either side, right? And so, our politics right now are engineered for status quo, and not for change, and not for any big changes.
I don't know if that changes, I don't know if there's something that sweeps across our politics and just changes that, and we can actually make big progress towards some of these ideas, but at the end of the day, we have political parties who are deeply opposed, first and foremost, to each other. And if we're going to get to that kind of future, we're going to have to, I think, go back to embracing wholeheartedly American individualism, and letting people self-determine their values and what they want to do with their future.
And again, use the power of defaults to put people on the right course, and then let them make choices for themselves, optionally, around that. That, I think is the best possible future. Whether we get there in the next 10, 15, 20 years, it's hard to say.
Josh Itzoe: Certainly doesn't feel like it most days. Certainly doesn't feel like it.
Aaron Klein: Yeah.
Josh Itzoe: But I think what you're talking about in a lot of ways, and I'm an amateur behavioral economics geek, and-
Aaron Klein: Yeah, yeah.
Josh Itzoe: It's really about creating freedom of choice within a framework. Right? That's the beautiful thing about automatic enrollment, is you're not holding a gun to an employee's head saying, "You have to save for retirement."
Aaron Klein: "You're taking a pay cut, so that you can save for retirement." Yeah, that's not what you're saying.
Josh Itzoe: That's not what you're saying. What you are doing is, you're saying, "Look, we're going to remove the behavior," or like, "You have the whole opt out versus opt in." You're much less likely to opt in just because of behavioral inertia.
Aaron Klein: Yeah.
Josh Itzoe: On the flip side, you're much more likely to not opt out, and so it's really around, "Hey, we're going to put you in a position, a framework, we're going to put you in a position that we think clearly is in your best interest long term, but then you have the freedom to make your own choices."
This podcast, the whole mission of Fiduciary U™, the podcast, the website, is to make ERISA fiduciary smarter. So, what would be your single best piece of advice to do that? So, whether that's an advisor, that's an ERISA fiduciary, whether that's a retirement planning committee member who is a fiduciary to their employees. What would be your single best piece of advice to them?
Aaron Klein: Obviously, I'm biased, but I have spent the last decade of my life working on this idea. I really do think that getting the risk number, getting risk at the heart of how you hope participants make election decisions is critically important, because that's what drives ... We talked about all these ideas here on the episode today, but that's what drives buy-in and commitment, and behavioral change, is when people understand and are aligned with the idea of where they're going.
That's why I just really believe that that's one of the primary things that we could do to drive people to stick with their decisions for the long term, and ultimately get to see the benefits of them, is to make sure that they're aligned with the choices they're making, that they understand the choices that they're making, and they're bought into those choices.
Risk number alignment, to me, is the powerful way to do that. So, it's focused on what I do, but that's a big part of why I've kind of dedicated my life and career to it at this point.
Josh Itzoe: Yeah. No, I think that's great. As we wrap up, one of the things, knowing a little bit about your story and in preparation for this episode and whatnot, that I thought was really interesting and powerful was actually your personal story, and I think it helps kind of inform some of the things that you've talked about today, and the way that you lead your company.
But, it seems like it's one really kind of rooted in faith, and fatherhood, and maybe you could just share a little bit about that, because I think it's a really cool story, and one that people should hear.
Aaron Klein: Oh, well, thanks. I appreciate that. Yeah. For sure, I think that people who, I don't know ... I don't care if you're leading an organization that's large or small, I don't care if you're a CEO or an incredible individual contributor in a company, or anywhere in between. I think that the best leaders, and the best people lead integrated lives. Right?
Whenever I hear somebody talk about work-life balance, I go, "I gave that up a long, long time ago. I try to have work-life harmony, and integration, because I lead an integrated life and every part of me is connected to every part of me." And so-
Josh Itzoe: Alignment.
Aaron Klein: Yeah, alignment. Great, great, great point. My faith certainly informs a lot of that, and my wife and I, we grew up that way, and we grew up in church ourselves. That leads you to a whole way of thinking about serving others, it leads you to a whole way of thinking about the purpose of life and the meaning of life, and what we want to do with the money that has been entrusted to us. Right?
And I think, for one thing, that led us to thinking about ways to grow our family, so it turned out ... We ended up adopting three times. We were never diagnosed with any reason we couldn't have kids biologically, but it just wasn't happening immediately, and we just felt like it was Plan A for us, it was the right decision for us. And my youngest sister was adopted internationally, so we were very comfortable, understood the process, knew about it.
And so, we embarked on that in 2007, so we've adopted three times now. My first son was born in South Korea, my daughter was born in Ethiopia, and then our last son who's been ... He's only been at home about four years, but he is actually our oldest, and so he was born in Ethiopia, as well. That's been incredible.
We like to say we're just your typical average Korean Ethiopian American family. Nothing stranger than usual there. But it's been incredible because that has given us opportunities to get involved in giving back in Ethiopia, for example, with a great school project there that we support, we're building a vocational training for-profit technology business there.
I'm just on the board, and have kind of helped to get it started and raised some of the startup capital, but really-
Josh Itzoe: Is that Hope Takes Root?
Aaron Klein: That's Hope Takes Root-
Josh Itzoe: I think I have looked, and your wife ... Yeah.
Aaron Klein: Hopetakesroot.com, but the idea there is that we are literally on the ground with foreign investment, starting a for-profit technology business to serve Ethiopian small businesses, but what it really is, is it's a vocational school in disguise that spends at least 20% of its revenue, we're still very early figuring this all out, right? But it's going to spend at least 20% of its revenue hiring orphans and vulnerable kids as student workers, and that will basically be a vocational school, where instead of them paying tuition, we pay them.
And we're really excited about the idea of creating this model that is sustainable, that funds itself, and that eventually it can begin replicating itself. So, our mission this year is to get it off the ground, next year is to have it really be growing, have it launch its product and actually grow revenue. The following year, it's going to be profitable, and the next year we want it to start replicating out.
Exciting. Excited and honored to be a part of that, grateful to get the chance to be a part of that, and excited to see a lot of what eventually we ... I love what I do at Riskalyze, so we have no plans to ... I have no plans to exit this anytime soon, I'm signed up for a long, long journey ahead, but I'm excited to think about the capital that we're building in Riskalyze being invested in a great cause like that in the future. And so, that's where a lot of our money goes to, and non-profit giving goes to. It's an inspiring thing to be a part of.
Josh Itzoe: That's a great story, and we'll make sure in the show notes to put a link to Hope Takes Root, so people can learn-
Aaron Klein: Love it.
Josh Itzoe: ... a little bit more about what you guys are doing there. Just as we wrap, where can people go to connect with you or follow what you're up to at Riskalyze?
Aaron Klein: For sure. If you're on the Twitter, as they call it, that is probably my most active social network, so I'm @AaronKlein on Twitter, and on LinkedIn, as well, but Twitter is probably where I spend more of that time, and I think it makes the PR people sweat, but it's fun. You just try to have fun with it. I have-
Josh Itzoe: As long as you don't pull an Elon Musk, just-
Aaron Klein: That's right, that's right. I have sworn off all political arguing on Twitter, because I've discovered that I was wasting my time and not changing anybody's mind. So, I'll still joke about it once in a while, but no political fights on Twitter for me, but it's fun sometimes to just be a spectator and eat some popcorn and watch other people do it, though. Right?
Josh Itzoe: Right.
Aaron Klein: So, there you go. But yeah, I mean, and you can obviously connect with the company there and other places, as well, but I love connecting with people personally. And man, so many great financial advisors on the FinTwit subculture that has been created on Twitter. I think it's a fascinating group for conversation.
Josh Itzoe: That's awesome. Well, Aaron Klein, thank you so much for being the guest today, and just for your insights and perspectives, and I have a ton of admiration for what you've built at Riskalyze, and the way that you're empowering people to invest fearlessly. And so, thank you so much. We appreciate it.
Aaron Klein: Thanks, Josh. Thanks for having me.
Josh Itzoe: Thanks for listening to today's episode with Aaron Klein from Riskalyze. I hope you enjoyed our discussion, and it helped to make you a smarter ERISA fiduciary. If you'd like more information, or to learn more, go to fiduciaryu.com. I've got some great resources there for you, including each episode along with show notes, articles, free tools, and online courses.
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