There are many reasons why I’ve felt good about providing information and insights to independent advisors for the past 30 years or so. Back in the day, when most independents started their careers as either stockbrokers or insurance agents, I used to point out that they could be making more money (usually a lot more) if they’d have stayed with those big firms, but they started their own businesses to better serve their clients.
Today, thanks to the (also) 30-year trend toward replacing commissions with asset management fees, that’s not so true any more: many independent firms generate very healthy cash flows—and are worth upwards of seven figures when their founders retire. Yet there are solid reasons why I still feel good about helping independents in my small way. Because they are small, wholly owned businesses (as opposed to large corporations with shareholders to please), they can make judgments such as “this is enough profit, it’s a fair price, and we don’t need to make more.”
Consequently, the independent advisory industry has changed financial services for the better a number of times. That includes the shift to asset management, to the use of no-load funds, to the lowering of AUM fees well below 100 bps, to the current embrace of a fiduciary duty to their clients. Yet there are some trends in the independent industry that I’ve never felt comfortable about. Case in point: the use of TAMPs or other so called “third-party” asset managers. But I recently read about a new service that may promise to correct that situation: and raise questions about the value of advice, itself.
As for TAMPs, here’s my issue: 20 years ago, or so, independent advisory firms created and managed their clients’ investment portfolios. Financial planners typically also served as portfolio managers, or if a firm was large enough, it designated a partner and some staff to those duties. And they maintained a “back office” staff to handle the trades with the firm’s custodian or BD, to make sure the firm was getting its cut and to generate periodic reports. That “cut” was typically between 70 bps and 100 bps paid by the clients.
Then TAMPs came along, offering to take over all of this back office and reporting, along with a good chunk of the portfolio management itself all for the low, low cost of another 100 bps or so. And TAMPs’ pitch to owner advisors was that while the clients would pay that additional 100 bps, the advisory firm could eliminate the substantial costs of its back office and portfolio support staffs. The owner advisors got a big raise, while client costs effectively doubled.
While it’s possible that much of the TAMP business was generated from newly independent breakaway brokers who were used to charging 200 bps anyway, I still found the economics troubling. At least, until I listened to advisory consultant Steve Sanduski’s Sept. 6 interview with Scott MacKillop, an industry veteran whose First Ascent Asset Management is shaking up the TAMP business by capping its 50 bps annual fee at a flat $1,500—which kicks in on portfolios of $300,000 and up.
Here’s how Scott explained this approach:
“I looked at the percentage of assets-under-management-fee structure that the industry uses, and I couldn’t come up with any good explanation as to why we were using a fee structure about that, because with today’s technology, it doesn’t cost any more to manage a million dollar account than it does a hundred thousand dollar account. It didn’t seem fair or logical that larger accounts would pay more than smaller accounts.”
Now I don’t know how First Ascent’s services stack up against other third-party asset managers, but on the cost side, those capped fees can save a lot of advisory clients a lot of money. Yes, I realize that the clients are still paying for a service that offers to save the advisory firm a much bigger pile of money every year, but it is something. And it’s an excellent example of how technology is driving down portfolio costs that can be passed on to the clients.
I suspect the bigger question, however, at least in the minds of many independent advisors is: how are these new tech “savings” going to affect our business? Here’s what Steve Sandusky had to say about that: “This idea of having a flat fee for investment management to me has major implications for the investment management side, but also for the financial adviser’s side. Now, I have interviewed people on my podcast. Typically they are in their 20s and 30s that are launching their own RIAs, and they are charging this monthly subscription fee for planning services, and that includes investment management. We definitely have people out there today that are experimenting with these alternative fee structures.”
Which brings us back to MacKillop’s above statement: “It doesn’t cost any more to manage a million dollar account than it does a hundred thousand dollar account.” When it comes to handling client accounts, which is all done digitally these days, this statement is undoubtedly true. But is it also true of the advisory business?
Or put another way, can professional services really be reduced to how much time it takes to perform them? If it takes a doctor five minutes to determine that you don’t have lung cancer like they told you in urgent care but instead you’re just allergic to your front lawn, how much is that worth? If an advisor convinces her client to keep steadily saving for retirement over 30 years, how much is that worth? A lot, right?
And Mackillop agreed: “The financial adviser world is different than our world. Financial advisers have limited capacity. They’re dealing with customized, individualized needs, and really there is usually some relationship between the amount of work that’s required and the size of a client portfolio. Ironically, the ever-increasing assets-under-management-fee structure is probably more justifiable in the financial adviser world than anywhere else in the industry.”
Of course, AUM fees are only “ever-increasing” if an advisor manages a portfolio prudently—and convinces their client to save and to not take out money unnecessarily. That’s not something you can commoditize.