If You Can Commoditize Asset Management, Will Advisors Be Next?

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.