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Low-Fee Focus Spurs 401k Business Model Innovation

401K Specialist

By John Sullivan | June 20, 2016

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First Ascent is on a mission to disrupt the 401(k) and portfolio management spaces.

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The result, outsourced portfolio management firm First Ascent Asset Management, opened its doors for business earlier in June, predicated on “a whole lot of time spent thinking of ways to make the business better.” It’s something a decades-long track record of success enables him to do.

“The traditional approach of charging clients based on a percentage of assets under management just doesn’t make sense,” MacKillop, First Ascent’s CEO, said. “It doesn’t cost any more to manage a $1 million portfolio than a $300,000 portfolio, so why should larger accounts pay so much more? We took a hard look and concluded that clients, both large and small, are paying too much for portfolio management services. We decided to do something about it.”

“Doing something about it” involved five core principles on which to base his approach:

  1. Changing the Fee Paradigm. “As I mentioned, AUM fee schedule didn’t make sense in our asset management offering,” he further explained. “We rely heavily on technology to keep costs lean and mean. We employ a modified AUM fee that tops out at $300,000. It then becomes a flat fee no matter how big the account size becomes.”
  1. Investor Education. Portfolio management is one part of the problem in reduced returns, MacKillop said, but “there is no denying investor behavior is another.” The firm has information and educational material available, and have created “the financial education course that we all should have had but never did.” It provides a basic understanding of investing in six video installments each about three minutes long.
  1. Rethinking Portfolio Management. MacKillop spent a lot of time trying to re-think how portfolios are managed and felt the age-old and ongoing active versus passive debate “is just silly.” So he and his team built core/satellite portfolios using globally-diversified ETF strategies as a core and then adds in active allocations, “but only if we have a high conviction.” The end result is Global Explorer portfolios, which end up costing 16 basis points. “We also really try to focus on trading in re-balancing in a way to keep costs down, and the internal expense ratios are very inexpensive.”
  1. Humans Matter. “Instead of trying to make money selling investment products, coming at it from a client-centric perspective has us ending up in a very different place. Technology is great and has its place, but these are investments you can put Mom in and be happy with. It’s still human-centered.”
  1. Client Focus.“If you design a firm that truly puts clients’ interests first, you end up with a fundamentally different firm than if your focus is making money for the house,” MacKillop concluded. “We always ask, ‘What’s best for our clients?’”

MacKillop was president of ADAM Investment Services when it was acquired by Denver-based Portfolio Management Consultants (PMC) in 1997. He became President of PMC in 1998, but left in 2000 to found Trivium Consulting, a firm that helped financial institutions develop investment management services for financial advisors. In 2004, he went to work for Houston-based US Fiduciary Services and in 2007 he became President of Frontier Asset Management.