First Ascent Asset Management builds two series of portfolios for advisors: one using only ETFs, the other combining ETFs with actively managed mutual funds.

What’s unique about the firm is its flat-fee structure—advisors pay an annual flat $500 fee for any portfolio. The one-year-old asset manager, which is marrying the best that fintech has to offer for all its back-office needs with good old long-term-minded portfolio construction, is led by industry veteran Scott MacKillop.

Here he shares what lessons the first year in business has taught, and where the opportunities lie ahead. First Ascent has $50 million in assets under management.

ETF.com: Price is your big differentiator as a firm. How does your flat-fee pricing compare to an ETF strategist that charges, say, 0.25%?
Scott MacKillop: It depends on the size of the account. A $100,000 account for $500 is a 0.50% charge [$50 per $10,000 invested]. At $200,000, it’s 0.25%.
Now, our flat-fee pricing is for all accounts that are $100,000 or more. We realize the $500 pricing for smaller accounts can be burdensome, so we charge 0.50% below $100,000. A $25,000 account, for example, would pay 0.50%.

ETF.com: It would seem, in this business model, the only way you make money is if you manage to gain significant scale?
MacKillop: Absolutely. We estimate it’ll take us somewhere in the neighborhood of 2,500 accounts to get to a good, sustainable business model. Some of our businesses is still not at the $500-per-account level.
For example, we have a subadvisory relationship to manage some proprietary portfolios for Envestnet, and that’s on a basis-point basis. We have other relationships where people want to bring us larger asset quantities, and they want those managed on a basis-point basis. We’re trying to meet the client where they are.

ETF.com: To an investor whose account size is small, $500 isn’t exactly cheap—you can go to a robo advisor for less. What’s your unique value proposition in terms of portfolio offerings?
MacKillop: There are two things. First, the portfolios are unique in that we’re trying to combine active and passive management styles in one of the series of portfolios. That’s pretty unusual in our industry. Most people fall on one side of the religious divide or the other. We’re combining the two.
We also build our portfolios in a somewhat different way. We’re trying to stay focused on the costs associated with our portfolios, both the internal expenses and the trading costs, so we hold relatively few positions, and we trade them relatively infrequently. We have very low expenses.
Second, it’s the service side. We’re focused on providing a high level of service. For example, a lot of robo advisors will only take cash for accounts; they won’t transfer assets over and help with the liquidation process. We’ll take accounts in whatever form they come. If we need to, we’ll help them with a tax transition strategy, and work with them over time to bring the accounts over in the most efficient way possible.

ETF.com: In the ETF strategist space, fee compression is squeezing profit margins. It’s not an easy space in which to grow and make money. Why did you decide to start this business?
MacKillop: I’ve been in the business of providing outsourced portfolios to financial advisors for over 25 years. And I saw a number of areas where I thought we could do this better and more efficiently than it’s been done in the past.

One of the problems you have with a lot of the traditional asset management firms is they have very significant technology infrastructures. They built up portfolio accounting systems, trading systems, billing systems and performance reporting systems.

These days you could outsource all of that and save a tremendous amount of money. We outsource our back office entirely to Orion. That gives us a huge cost advantage.

A lot of the firms use a traditional wholesaler approach to try to promote their products. That’s very expensive. Putting highly paid individuals on airplanes and sending them out to visit with financial advisors one-on-one is expensive. We’ve built a different model, and use primarily our website and videos to communicate with advisors.

Our office space in Denver doesn’t look anything like a normal asset management firm. We’re in a co-working facility with lots of tech companies. All of those things were designed to help save money.

But then the pricing structure was something that was really our focus when we started the firm. It seemed like the traditional assets under management fee structure didn’t reflect the actual work that was involved in doing the kind of work that we do.

And the truth is, it doesn’t take any more work for us to manage a $1 million account than a $100,000 account, so it didn’t make sense to have a vast difference in the fees that were charged to the clients. We came up with the flat fee pricing, and we’ve gotten tremendous response from the advisor community.

ETF.com: What have you learned about the advisory space in this first year—biggest advisor needs, biggest challenges? Anything surprising?
MacKillop: I haven’t really experienced any surprises, but it’s mainly been confirmation of what we originally thought when we set out to do this. We made an adjustment in our pricing. Our original pricing when we started out a year ago was a capped-fee approach—we charged 0.50% up to a $300,000 account, and then we capped it at $1,500.

We found people were interested in that business model, but it wasn’t compelling enough to get them excited enough to work with us. Moving to the $500 flat fee really generated a lot of enthusiasm. We learned that the simplicity and transparency of a flat-fee model was a powerful factor in attracting advisors to the firm.

We also learned that combining active and passive management styles, while focusing on keeping costs low, was very appealing to advisors. There aren’t many asset managers doing this, using passive ETFs with very low expense ratios along with some active mutual funds.

And I would say that—and this is something I didn’t really expect—there were a lot of people who liked our pricing model, but they were focused on a passive strategy. They didn’t like the combination of active and passive management, which is what led us to create our ETFs-only portfolios.

ETF.com: When it comes to choosing between an ETF and a mutual fund, in what instances is a mutual fund a better choice than an ETF?
MacKillop: Our portfolios that use both mutual funds and ETFs start as all-ETF. We use a core satellite approach, and the core is all ETFs. That’s our starting place, where, if we have no strong opinions, or if we don’t find a skilled manager somewhere, we’ll go all ETFs. That’s because ETFs are so efficient, so low cost and we can get the broad diversification that we want at a very, very low price.

But we then ask the question, is there an opportunity to add value through a satellite that may be another ETF, or through an active manager?
We have active mutual fund strategies that are in the portfolio solely because of their proven track record as good stock pickers. Each portfolio decision is a different situation, but basically, unless an active manager really brings the flexibility or the alpha we’re looking for, ETFs are a better choice.

ETF.com: In the passive space, then, you never choose a passive mutual fund over a passive ETF? ETFs always win?
MacKillop: Correct. We’re always using the ETFs. We’ve found that costwise and tax- efficiencywise, ETFs work for us best in most cases.

ETF.com: How do you pick ETFs? Are you brand agnostic?
MacKillop: We start out with the entire universe, but we use primarily ETFs that are available through custodians we’re working with. Right now, our primary custodian is TD Ameritrade. So for the ETF-only portfolios, we’re working just exclusively off of the TD no-transaction fee ETF list.

ETF.com: What’s been the biggest challenge to running an ETF strategist business?
MacKillop: Just the friction of day-to-day life for financial advisors. Most advisors run relatively small businesses, and they’ve got lots of things to do.

The challenge for us is to try to break through the noise and try to communicate with them effectively to let them know what we’re doing. And then be patient and let them move in our direction at their own pace. It’s just really learning to be patient and to accept the fact that not everybody’s going to jump on board on day one. You have to take your time.

Portfolio X-Ray: First Ascent Global Explorer 60

There is no single recipe to building an ETF portfolio. But understanding how a portfolio is built is key to picking the right one. And choices certainly abound, with hundreds of ETF strategist portfolios commanding nearly $100 billion in combined assets today.

For that reason, we are setting out to better understand how ETF strategists go about creating these portfolios in a series of interviews that look under the hood of some of the ETF portfolios available to retail, institutional and advisor clients alike.

Today’s Portfolio: First Ascent Global Explorer 60
Provider: First Ascent Asset Management
Provider Total AUM: $50M
Who We Talked To: Scott MacKillop
Portfolio AUM/AUA: $7.5 million – $50 million companywide

Primary Goal of the Portfolio: The portfolio is designed for investors seeking long-term appreciation who are willing to accept some downside volatility to achieve it. It’s for investors who can accept moderate risk.

Methodology: The process is simple. The firm uses a “core plus satellite” approach. The “core” of each portfolio provides very broad diversification among global securities markets. Each core consists of low-cost investments, such as index funds or ETFs that track domestic or international stock or bond markets. The core will represent between 50% and 100% of each portfolio. “Satellites” may consist of actively managed investments like mutual funds, or passive strategies. For example, an actively managed mutual fund may be added as a satellite because the firm believes in the skill of its manager, or First Ascent might add an ETF to gain exposure to an asset class not represented in the core. The satellite is meant to improve the portfolio’s long-term performance.
The composition and allocation of each portfolio are reviewed at least monthly. The portfolios are rebalanced annually.

Target Client: All types, including retail and institutional

Asset Allocation Breakdown:

US Equity: 36.00%
International Equity: 24.00%
US Fixed Income: 21.00%
International Fixed Income: 10.00%
Non-Traditional Fixed Income: 5.00%
Market Neutral: 4.00%

All ETFs? No

ETF Included in This Portfolio:

• iShares Core US Aggregate Bond (AGG)
• SPDR Barclays Intermediate-Term Corporate Bond (ITR)
• Vanguard International Bond Index (BNDX)
• Vanguard Total International Stock Index (VXUS)
• Vanguard Total Stock Market (VTI)

Fees: Expense Ratio: 0.20%

Management fee: $500 annual flat fee, regardless of account size

Performance as of 06/30/2017:

• YTD: 7.13%
• 1 Year: 11.4%

Contact Cinthia Murphy at cmurphy@etf.com

Disclosures (to be provided with performance): The Global Explorer performance shown are composite returns of actual client accounts calculated in accordance with GIPS® standards, but have not been independently verified. Performance is presented gross of fees and does not reflect the payment of advisory and certain other fees, but is net of transaction charges and expense ratios charged directly by investment funds used. Returns and data points for period longer than one year have been annualized. Client’s returns would have been reduced by the investment advisory fees, and any other expenses that would have been incurred in the management of its investment advisory account. Clients may have had investment results that are materially different. Investments are not guaranteed and are subject to investment risk, including possible loss of the principal amount invested. The information contained herein does not constitute investment advice or a solicitation by First Ascent Asset Management. Past performance is no guarantee of future results.