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.
“We’ve taken a global market portfolio and taken out all the little tiny pieces, the less than 5% slivers,” MacKillop said. “Each time you buy a position for a portfolio, it costs something. People kind of know that, but they don’t really think about the impact of transaction costs very much.”
There are three core portfolios of international and domestic stocks and bonds that represent about 85% of the global market portfolio, MacKillop said, that are supplemented by actively managed or indexed satellites. Each core portfolio has an internal expense ratio of about nine basis points, which increases to 13 or 14 basis points once the satellites are added.
The team rebalances portfolios once a year, MacKillop said. “It’s not clear that rebalancing actually adds that much value at all,” he said. “It’s hard to say what the optimal strategy would be because it’s so time dependent and situation, but if you had to pick a default number, a year would be about right.”
The firm is under contract with Envestnet to offer the portfolios on its platform, although they’re not available yet, MacKillop said, and discussions are ongoing with Adhesion.
The firm manages some money for friends and family, but otherwise doesn’t work directly with investors. “It’s too hard to straddle those two worlds. Advisors just get nervous. I’ve had the question already, ‘You’ve got this low, flat fee and they’re going to ask me why [they] can’t just go to you,’ and the answer is because we won’t work with them.”
Another driver for the firm is a focus on client education. As he was developing the business, MacKillop felt asset management firms were too focused on the portfolio construction part of the business and not addressing clients’ actual behaviors.
“Everybody recognized that there are all these behavioral finance issues, but I didn’t really see the asset management firms doing anything to try to combine that idea with the portfolio construction.”
At best, he said, firms would create sales and marketing literature with a “behavioral bent,” but that ultimately directed clients to the firm’s products.
First Ascent created a financial literacy course that teaches consumers the material “that we all should have had in school,” MacKillop said. “Rather than a white paper that was full of charts and graphs, footnotes referencing Daniel Kahneman’s latest work,” he said he wanted to offer investors “simple, three-minute videos that would deliver the core ideas and let people be able to digest them one at a time.”
Initially designed as an incentive for working with First Ascent, the course materials, available as videos and PDFs, are available to any consumer.
— Read “How to Increase Financial Literacy? Start Young, Train Teachers” on ThinkAdvisor.