As the Department of Labor’s fiduciary rule forces advisors to examine how they are compensated on retirement advice, and competition and commoditization of advice drive fees lower, advisors are taking a closer look at what they offer clients and what those clients are paying. A new investment advisory firm is trying to manage the fee problem by capping them so that the largest accounts pay the same annual fee as those that reach the fee ceiling.
First Ascent Asset Management is based in Denver, and launched in mid-June. Its CEO, Scott MacKillop, is a 25-year veteran of financial services, most recently at Frontier Asset Management where he served as president.
“I realized that I’d been in the business for 25 years and never really thought about the fee schedule,” he told ThinkAdvisor on Monday. “Suddenly it just dawned on me that it didn’t make any sense given the actual work that went into building the portfolios, especially with a lot of the new technology.”
MacKillop wanted to implement a flat fee, but “that’s pretty hard to do because you have to make it a pretty low flat fee if you’re going to service the smaller accounts. Maybe some day we’ll get there, but we have to generate a little revenue first.”
For non-discretionary accounts, the annual fee is 25 basis points and capped at $1,000. “Once an account reaches $400,000, the fee never goes up,” MacKillop said. “You could have a $1 million account or a $5 million account, and still pay $1,000.”
On discretionary accounts, the annual fee is 50 basis points and is capped at $1,500.
Clients sometimes don’t fully appreciate what they’re paying when fees are disclosed in basis points. “When you reduce it to dollars, which we hardly ever do in financial services because then people would actually know what they’re paying, it’s real money,” MacKillop said.
He noted that this fee structure is “sort of the perfect solution” to the DOL’s conflict of interest rule. “There are no 12b-1 fees in the ETF world,” he said. “There are no custodians paying us anything. We’re a low–cost solution in an environment where people are calling for a low-cost solution.”
First Ascent doesn’t manage any 401(k) assets, but MacKillop said that if the firm were to do so, it would try to establish a flat fee for the plan sponsor. “In the retirement planning environment, there are more liabilities involved. It will probably turn out that there’s more work to do, so I’m not sure exactly how the pricing will work. It will probably be a little more expensive, but not dramatically so.”
To keep costs low, First Ascent uses a limited number of positions in portfolios, focuses on index funds and ETFs, and takes advantage of technology to create economies of scale.
“I started thinking about how the technology is just different now. If you start a firm today, you can do things differently than if you’d started the firm 10 or 15 years ago,” MacKillop said.
Back then, firms were supported by multiple operations people who could run the portfolio account system and the reporting system, he said, but with today’s outsourced solutions like Orion and platforms like Envestnet, “you can really build a company that doesn’t entail that kind of operational infrastructure.”
The firm uses a core-plus-satellite approach to building portfolios with limited positions in order to keep transaction costs low.