The trend for financial planners is away from the AUM revenue model toward an annual fixed fee (retainer), recognizing that a $5 million portfolio doesn’t require significantly more work than one that contains $500,000. 

But then you have to ask: why don’t the asset management firms and mutual funds acknowledge this same reality?  Shouldn’t they, also, charge flat fees for their services?

One does.  Meet Scott MacKillop, founder of an asset management outsource provider called First Ascent Asset Management (http://firstascentam.com/).  His Denver-based firm made a few waves recently when it announced that the company would manage any of your client portfolios—with services like rebalancing, researching and (if necessary) replacing funds, plus performance reporting—for a flat $500, whether the account is $100,000 or larger than $10 million. 

“At the beginning, we charged a percentage of assets, but capped the fee at $1,500,” MacKillop explains, “because the truth is, there’s no extra labor for managing a large account than a smaller one.  Our goal has always been to offer flat fee pricing, and we finally decided to bite the bullet.” 

By outsourcing the trading and back office functions, and using low cost funds, First Ascent’s model “core and explore” portfolios also happen to be pretty cheap.  First Ascent Global Explorer and Global Explorer Tax Sensitive spectra of models feature blended expense ratios around 23 basis points a year: 9 basis points for the core of index funds, plus three or four “explore” funds or ETFs which incrementally raise the total expense—and, hopefully, pay for the cost of First Ascent’s service in the form of extra returns above the indices.

Making the Team

MacKillop is one of the quieter thought leaders in the asset management business.  Since graduating from Stanford University in 1972, he’s worked at a variety of TAMPs, including stints as President of Portfolio Management Consultants, Trivium Consulting, U.S. Fiduciary Services and, most recently, Sheridan, WY-based Frontier Asset Management—a firm that this publication takes very seriously as an outsource investment option.  In the past month, MacKillop has published a white paper exploring the possible ways to regulate robo advisory firms, and the First Ascent website includes videos where MacKillop explains basic financial concepts to investor visitors.

After 40 years in the business, he’s well-versed on the financial services industry’s trends, and has been a consistent early adopter.  Flat fee pricing is a a trend in the early stages for planners, so MacKillop decided to be the first to introduce it to the asset management world. 

“I just don’t believe the traditional approach, where you charge clients based on a percentage of their total portfolio, still makes sense,” he says.  “Why should those larger accounts pay more than the smaller ones, when the costs are approximately the same?  I’ve always believed that most clients—and most advisors—are paying too much for portfolio management services.”

What do you get for $500 per client?  You can choose from (or blend together as sleeves) ten model portfolios.  The Global Explorer 20, 40, 60, 80 and 100, and the similarly-named Global Explorer Tax Sensitive 20, 40, 60, 80 and 100 are what you think they would be: the numbers indicate the percentage of the portfolios that are invested in risk assets, allowing clients or advisors to choose where they want to be on the efficient frontier.

Each portfolio looks a lot like an index-oriented planner’s preferred mix of investments: the cores are allocated in varying percentages to the Vanguard Total Stock Market fund, Vanguard’s Total International Stock fund and either Vanguard Tax-Exempt Bond (for the tax-sensitive Explorers) or a combination of the iShares Core U.S. Aggressive Bond fund and the Vanguard Total International Bond fund.  The “explore” side adds 4-7% allocations in the Blackrock Strategic Income Opportunities fund, the PRIMECAP Odyssey fund, the SPDR International Corporate Bond fund and the Vanguard Market Neutral fund.

In the half-year ending December 31, 2016, the explore allocations added anywhere from 1.07% to 2.04% above their benchmarks, but MacKillop says that this time period is really too short to draw any conclusions, and in any case the overall contribution to the portfolios are small.  “Our investment committee takes a look, every month, at the satellites as though each of them had to make the team all over again,” he says.  “People somehow think there’s a lower threshold to keep a fund on the team than if you were buying it for the first time.  We’re trying to look at all of those critically at each meeting.”

Modified Annual Rebalancing

First Ascent’s service menu also includes rebalancing, and MacKillop, after reading various studies (including, he says, analyses by Michael Kitces and Michael Edesses) has decided that modified annual rebalancing is the most efficient strategy.   

Modified?  “If you look at the literature, there is no perfect rebalancing strategy,” he says.  “We reserve the right to rebalance more or less frequently,” MacKillop adds.  “Just mechanical rebalancing might lose the opportunity to look at the current situation and say, there has been a great runup but we are getting past where we think reasonable valuations are, so maybe we should rebalance a little early.  Or we could say, hey, the momentum of what’s happening here looks like it has some strength, so we’ll let it go a little bit longer.”

These signals have to be obvious, however, before First Ascent will deviate from tax-aware rebalancing each December.

Automated Proposals

Advisors also get the usual reporting services, outsourced and customized through the Orion Advisor Services system, plus billing.  They also get a service that currently resides only on the automated online (robo) platforms: automated client onboarding and proposal generation.  First Ascent worked with Forward Financial Technology, a Denver-based startup that is creating automated proposal generation and onboarding solutions for institutions—and, ultimately, individual planning firms—building these processes around an integration with DocuSign. 

“Advisors can go on our website day or night, run proposals and open accounts without having to interact with us,” says MacKillop.  “We’re offering a totally automated account opening process, just like the robos.” 

And unlike many of the online asset management platforms, First Ascent’s system allows clients to bring over their current portfolio, without having to sell everything and import cash.  First Ascent staffers, including CFA-holder Ryanne Randall, will help these clients tax-efficiently transition the existing asset mix to one of the models over a period of months or years.

Cost Structure

The First Ascent website also features those aforementioned videos, a total of six so far, including one that explains investment risk, another that talks about the importance of saving, and a third that helps define the value of a good financial planning professional relationship.  (Scroll down to the bottom of this web page to see them all: http://firstascentam.com/knowledge-center/#the-classroom).  MacKillop is also creating quarterly videos for a 401(k) plan, and now an advisor is coming in quarterly to use the same facilities to create his own client communication videos.

“That wasn’t a part of our original thinking,” MacKillop admits, “but it’s a tool that a lot of people might find useful.  So we’ll probably end up offering that too.”

He maintains, however, that providing low-cost service around low-cost portfolios is really the value proposition for First Ascent.  “Part of the way that we can offer the low fees is by figuring out different ways of doing things that have traditionally cost a lot of money,” he says.  “By outsourcing everything but our core value proposition, we’ve made it possible to provide high-quality asset management under what we believe is the cost structure of the future.

“If it’s good enough for financial advisors,” he adds, “then it should be good enough for us on the portfolio management side of the business.”

To add some perspective, the transition from AUM-based pricing to flat quarterly or annual fees is still kind of bleeding edge for advisors—and totally unheard of for mutual funds and TAMPs.  But if you believe that these trends follow each other, then it’s possible that flat fees are the future of both.  The logic is certainly the same: a larger investment account, simply due to its size, doesn’t represent more work.  So why should the fee be based on size?  (Nobody has ever given me a good answer, except to vaguely cite greater liability concerns.)

Also, and perhaps most importantly, advisors dislike paying for any outside services based on AUM.  They achieve scale by leveraging technology and service providers, and they lose scale when those outside providers bill based on the attendant rising revenues.  Because this defines market demand, I suspect that we’ll look back 10 years from now and see more funds or outsource investment firms charging the way First Ascent is doing.

Many advisors will want more ability to customize client portfolios than the early version of what First Ascent is offering, but if you believe that your value lies elsewhere (i.e. planning and managing client emotions during the market roller coaster), then trading your back office staff costs (say, three people at $60,000 a piece) for $500 per client (200 clients, $100,000 in total costs) is a rare bargain in our space.