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Scott MacKillop, CEO of First Ascent.

Technology > Investment Platforms > Turnkey Asset Management

Scott MacKillop: The SEC Warning TAMPs Don't Want to Talk About

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Recent risk alerts issued by the Securities and Exchange Commission informed advisors that they must treat the decision to hire a turnkey asset management platform (TAMP) as an investment decision with fiduciary duties attached.

“The SEC is looking at: are you watching out for your client when you make this decision, or are you [mainly] using the TAMP because of some benefit you’re going to get? Advisors need to make sure they’ve made that decision based on the client’s best interest, not their best interest,” argues Scott MacKillop, CEO of First Ascent Asset Management, in an interview with ThinkAdvisor.

The risk alerts also covered wrap-fee programs, for which the commission requires processes and procedures in place for the purpose of “mak[ing] sure the decision to use the program was in the client’s best interest,” says MacKillop, a 2021 ThinkAdvisor LUMINARIES award winner in executive leadership.

Similar documentation is required regarding TAMP selection, and advisors are subject to penalties, including civil penalties and disgorgement of profits, if they do not comply, according to MacKillop.

His investment management firm was the first and arguably still the only full-service TAMP to use a flat-fee approach to pricing. When he launched his firm in 2015, that fee was $500.

He argues that many TAMPs who charge high fees and offer “mediocre” investment management avoid talking to prospects about the fiduciary aspect of TAMP selection, focusing their sales pitch instead on “the benefits to the advisor as opposed to the benefits to the client.”

Before forming First Ascent, he was a corporate and securities lawyer for more than 15 years.

ThinkAdvisor recently held a phone interview with MacKillop, who was speaking from First Ascent’s base in Denver. In the interview, MacKillop also discussed other pitfalls to avoid in selecting a TAMP and reasons for not hiring one at all.

Here are excerpts from our interview:

THINKADVISOR: What’s a hot issue in the TAMP world right now?

SCOTT MacKILLOP: The SEC recently sent a series of risk alerts to advisors and TAMPs. Most TAMPs don’t really talk about this at all.

Why not?

The alerts say that when [an advisor] select[s] a TAMP or a wrap-fee program, that’s a fiduciary decision — and you should know that [the SEC] look[s] at it that way.

What’s the SEC requiring advisors to provide?

Advisors need to have processes and procedures in place that describe how they’re going to view the TAMPs [for selection], what factors they’ll look at and how they’re going to make sure that the TAMP they select is in the client’s best interest.

If an advisor wants to work with a TAMP, they need to treat it like an investment decision to which their fiduciary duties are attached.

What do the alerts say about wrap-fee programs?

Advisors who use them need to have processes and procedures in place to ensure the decision to use the program was in the client’s best interest.

Why don’t TAMPs want to talk about these risk alerts?

Because it’s not necessarily in TAMPs’ interest to do that. A lot of TAMPs are charging pretty high fees, and the quality of their investment management is mediocre — sometimes maybe worse.

So they don’t want to talk about that. Instead, they want to talk about the great technology or practice management they’re going to provide.

They’re focusing their pitch on the benefits to the advisor as opposed to the benefits to the client.

The SEC is looking at: are you watching out for your client when you make this decision to use a TAMP, or are you [mainly] using the TAMP because of some benefit you’re going to get? That’s a big issue.

Are advisors vulnerable to a penalty?

That’s going to depend on the situation. If the SEC comes in and initiates an enforcement action against an advisory firm, that’s a pretty good penalty by itself.

But there could also be civil penalties, disgorgement of profits and all kinds of ancillary consequences.

The important thing is for advisors to treat the decision to hire a TAMP as an investment decision. It’s a very important perspective they need to have.

A lot of advisors don’t think about TAMPs that way. They think of them as service providers for getting financial planning software, for instance.

However, the decision to work with a TAMP is a fiduciary decision. So advisors need to make sure they’ve made that decision based on their clients’ best interest, not their best interest.

When an advisor decides to hire a TAMP, they have to make sure the price is reasonable and fair to the client, that their performance is good and that they manage assets in a reasonable way.

It’s the same set of questions that an advisor would need to go through if they were buying a mutual fund for their client’s account.

When you received those SEC risk alerts, what action did you take?

We created a set of processes and procedures for the advisors who work with us, which we sent to them so they could adopt them. We also sent a standard due diligence package.

If the SEC shows up in their office and asks them who the heck First Ascent is and why did you pick them, the advisor will have the processes and procedures in place and a very extensive due diligence file on why they selected us.

When I interviewed you in April 2018, your firm was the only TAMP operating with a flat-fee model. Have other TAMPS picked up on that?

When they were in head-to-head competition with us, some TAMPs quoted a flat fee to try to get the business.

But I haven’t seen another firm that provides a full-service TAMP offering that has adopted a flat-fee approach to pricing.

Why? It seems to have worked out well for you.

It has. But In order to do what we do, you have to rely [heavily] on technology. A lot of firms have pretty old tech — distribution systems that are very expensive and inefficient — sort of the [in-person] “wholesaler-driven” distribution model.

What’s your model in that regard?

Way before COVID, we designed our distribution around virtual interaction with advisors. So we’ve kept our costs down and efficiency [up].

And if a big TAMP wanted to adopt flat-fee pricing all of a sudden, their overall revenue would dramatically decrease, and their costs would remain the same. So they’d have to eliminate a quarter or a third of their staff to maintain profitability.

It goes back to the fact that I think they’re charging too much in the first place.

If they charge what we think is a fair and reasonable price, they’d have a problem maintaining their business model.

How would you describe the status of the TAMP business today?

A lot of TAMPs have a little bit of an identity crisis. They’re not sure if they want to be an investment management firm, a technology firm or a supermarket of other people’s products.

What’s yours?

We’ve been very clear from the beginning that we’re an investment management firm. We view ourselves as an extension of the firms that we work with.

A big issue is whether an advisor should outsource in the first place. Your thoughts?

Some advisors who got into the [financial services] business because they love investing should recognize that their passion is investing, and probably they shouldn’t be a candidate for outsourcing.

They’d lose the fun part if they gave it up to somebody else. But firms that are interested in building their practices into bigger, faster-growing [businesses] and selling them down the road are better candidates: They can build investment management capabilities into their firm using a TAMP and devote their time to other, more important, issues.

What type of support do advisors need most from a TAMP?

TAMPs serve as a knowledgeable second opinion for advisors. A lot of them work by themselves or at very small firms and like to have access to a [company] that has a lot of resources in different areas so they can talk to people and understand how to best serve their clients.

What makes First Ascent so successful?

The first thing is the flat-fee pricing, which we initiated when we opened our doors six years ago. And our focus on investment management has made us really successful.

What differentiates the portfolios that you build for advisors?

We let the advisors dictate the types of portfolios that we manage. Some combine active and passive management. Some are passive only. We have factor-based portfolios and ESG portfolios [etc.].

We’ve kept the cost of our portfolios very low. All the research shows that the one factor that correlates the highest with good performance is low cost.

And we avoid taking risks that will blow up in the advisor’s face. We try to make sure that we’re managing the portfolio in a way that won’t embarrass the advisor or cause them to be very out of sync with what’s going on in the marketplace.

What are pitfalls to avoid when selecting a TAMP?

You need to check out all the things you would look at if you were buying a mutual fund or an ETF for your client.

Some people find they’re not really disposed to giving up control, and that can create a problem for them.

Advisors also need to be aware that there are differences in the quality of the investment management that TAMPs provide. Some don’t even discuss the quality of their investment management services. They’d rather talk about the cool technology they have and bury investment performance in the backyard.

The service level is really important. Some TAMPs have become so big that they’re a little bit like a big cable TV or health insurance company. You get 800-number-type service and they’re not very knowledgeable.

Anything else?

Make sure the chemistry is good. As I said, the TAMP is kind of an extension of the advisor’s firm at some level.

So you’ve got to make sure the people you’re dealing with care about you and your clients and are going to be a good match to work with for years and years.

You won a 2021 ThinkAdvisor LUMINARIES award for executive leadership. What’s your style of leadership, and why does it work?

I can sum it up in this quote from the Chinese philosopher Lao Tzu. Centuries ago he wrote, “A leader is best when people barely know he exists. When his work is done, his aim fulfilled, they will say, ‘We did it ourselves’.”

I try to get very talented people on the team and make sure they have the right attitude — a servant mentality [for clients].

I try to make sure they understand the general direction we’re going, and then I get out of their way and let them do their thing.

I try to support them if they need help. Otherwise, I let them have control over their world as much as possible. I try not to micromanage and be overly critical.

I try to be OK with the fact that not everybody does things the way you do them.