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Newly Formed Firm Fires Broadside At Managed Account Fees

Financial Advisor

By Christopher Robbins | June 29, 2016

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First Ascent plans to disrupt the managed account business on three fronts. Learn how.

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Scott MacKillop plans to “Vanguard” the managed account space.

Until now, it’s been easier to find low-cost advice than it is to find low-cost asset management says MacKillop, who plans to change that with the launch of his new firm, Denver-based First Ascent Asset Management.

“I wanted to see if we could do things a little differently, maybe a bit better than managed accounts have been done before,” MacKillop says. “We wanted to build the kind of firm that an advisor would want to bring their mother into to work with us. We focused on a design that produces good results for the clients, rather than starting with a design that makes a lot of money for the people starting the firm.”

First Ascent launched earlier this year with aspirations of disrupting the managed account industry from three directions: flat fees, lower-cost investments and free financial education resources.

By introducing a flat-fee structure for its portfolios, First Ascent will offer asset allocation at fees that more closely resemble Vanguard mutual funds than those of most investment managers.

Under First Ascent’s scheme, discretionary accounts are charged 50 basis points AUM, while non-discretionary accounts are charged 25 basis points AUM. However once an account reaches a certain size, between $300,000 and $400,000, clients’ fees are capped and would never increase. First Ascent caps fees at $1,500 for discretionary accounts and at $1,000 for non-discretionary accounts.

“There are financial advisors already doing this. This seems like the way the advice and planning industry is moving,” MacKillop says. “The asset management world is still largely based on a percentage of AUM. We like the flat-fee because it’s transparent. In January, an advisor would be able to tell their clients exactly what they’ll pay for their portfolio.”

For those fees, advisors can offer clients First Ascent’s “Global Explorer Portfolios” designed for long-term investors. Using a core of low-cost index mutual funds and ETFs and satellites of actively managed mutual funds, index funds or ETFs, the portfolios are offered in varieties that appeal to clients’ different risk tolerances.

“We’re combining active and passive, which also seems to be unusual for our space,” MacKillop says. “The active-passive debate really isn’t in the client’s best interest; you can benefit from both.”

Eventually, all First Ascent accounts will be charged a flat fee regardless of their asset levels, says MacKillop.

First Ascent’s portfolios generally feature a handful of funds with very low expense ratios — offerings from Vanguard feature prominently in the core allocations. Satellite holdings are added “only if we have a high conviction,” says MacKillop. All told, the Global Explorer Portfolios carry expense around 15 basis points.

“The expense ratios end up being around 50 to 60 basis points lower than what our competitors generally start out with,” MacKillop says, adding that the portfolios are rebalanced once a year. “Rebalancing has become an accepted part of what asset managers do, but we rarely stop to consider that we’re increasing the expenses within the portfolio without paying attention to whether we’re rebalancing at an optimal time. It’s hard to argue that frequent rebalancing adds value. When you start with few positions in low-cost funds that aren’t traded very often, and add on our low, flat-fees on top of that, we’re creating a 1.5 percent advantage over a lot of our competitors at the beginning of the year.”

The firm is also offering investor education via the web. First Ascent has launched a public YouTube channel that features short videos on the basics of investing.

“We’re trying to address financial literacy and create the course that we all should have had in school but never did,” MacKillop says. “These reinforce many of the basic messages that advisors are hopefully giving to their clients, and they do so without trying to sell anything. We don’t even really mention our firm.”

MacKillop says that First Ascent’s portfolios are ideal for the new breed of flat-fee or retainer-fee financial advisors, but will also attract traditional wealth managers.

The flat-fee approach is an educated gamble for a 40-year industry veteran like MacKillop, who acknowledges that his firm will need to bring upwards of $300 million in assets under management to reach the break-even point.

“The idea is to roll with this until it does make a profit,”MacKillop says. “I think we’re going to make it up in time. Our fees, our offerings make us different on day one.”

Currently, First Ascent is under contract to offer its portfolios on Envestnet’s platform, and is in discussions with other platform providers.

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