Brooke’s Note: If the SMA business had a motto during last few years, it might have been: keep your head low and your fees high. As robo- and ETF-disruption has torn at the fabric of the advice and mutual fund businesses, the SMA business quietly held its own. In fact, SMA veteran Scott MacKillop says that it never really crossed his mind to introduce low, capped, non-AUM fees to SMAs until he left the business in 2015. But the more he thought about it, the more sense it made. Now he has bootstrapped First Ascent to a place where he says he can taste success — and translate it into an elevator pitch that attracts RIAs and high-quality employees. Full disclosure: MacKillop has written articles for this publication.
Scott MacKillop parted ways with his former partners for the oldest of reasons — irreconcilable philosophical differences.
Now the former president of Frontier Asset Management, which manages $2 billion of AUM, with a modest chip on his shoulder, is unleashing a startup firm in Denver, Colo. built on a dismissed idea.
He is introducing robo-level fees to the SMA business — capped at a measly $500.
The deep-discount strategy could prove very competitive to his former Sheridan, Wyo.-based firm, which charges 50 basis points on the first $500,000 — a fee that slides to 20 basis points at $5 million but never goes lower, according to the ADV.
But First Ascent Asset Management is also putting a bull-s-eye on the broader $4 trillion business of separately managed accounts and the $100 billion or so of revenues that that industry rakes in annually.
Flat and capped
First Ascent is charging a $500 annual flat fee, or an .05% fee, for every $1 million of assets managed. The $500 is capped.
“The flat fee differentiates us from every other asset manager on the planet,” says MacKillop. “The one strong feature it is totally different and a tremendously good deal for clients.”
He adds: “I’m sure there are those who want to watch us a little longer before they decide to work with us.”
Analyst Scott Smith at Boston-based Cerulli Associates says this new pay structure could have staying power. “I don’t know of others that have used such a pricing model in the past, but it makes sense if we consider that the job itself is scalable.”
Currently, separate accounts fees, though they can differ broadly, often hover around 1.1% to 1.6% of assets under management, according to the New York-based Money Management Institute. That said, the MMI considers these to be all-in fees that include charges for investment management, overlay management and advisory services. It does not break out investment management costs from advisory services. See: Why mini-TAMP EQIS just got a maxi private equity infusion after judicious scavenging of Curian.
Analysts admit to being somewhat mystified by what MacKillop, 65, is attempting to do — wondering if he is in danger of charging too low a fee to ever turn a profit.
“It is tough to make money with this pricing parameter,” says Charles “Chip” Roame, managing partner of Tiburon (Calif.) Strategic Advisors.
He adds, however, that “many great innovations are started by changing the pricing paradigm and growing scale.”
Shock and awe pricing
MacKillop allows that he tried to enter the market at an asset-based fee of 50 basis points with a cap of $1,500 — rationalizing that it seemed disruptive enough.
But not enough RIAs were biting. They told MacKillop that the pricing was good but not good enough to encourage them to jump at the offer and start moving assets to First Ascent.
When MacKillop slashed prices yet again to current levels — namely a flat $500 fee — advisors reacted with far greater haste to sign on.
“We’ve seen a very different reaction,” he says.
The other on-the-fly change First Ascent made was to embrace a largely passive investing approach. “We ran into the world of people who don’t like active management at all.”
Low burn rate
First Ascent now has $5 million on its platform, according to MacKillop, but says advisors are in various stages of moving $50 million more over. MacKillop has signed up 28 advisors and another 17 have promised him they’ll be using his firm to some degree in the future.
To date, First Ascent has been funded by MacKillop with additional help from family and friends, but MacKillop acknowledges that he is now looking for additional sources of funding.
“I’ll get funding, even if I have to take a second mortgage,” he says. “You can see it’s going to work now. There’s no way I’m going to let this thing fall apart.”
Given the unlimited upside — an achievable break-even point of about $400 million — the burn rate is fairly low, though MacKillop has a staff of nine people — four of whom came over from Frontier. Most staff members are in their 30s, with the exception of two women in their 50s and MacKillop’s son, who is 28. MacKillop allows that his expenses range north of $1 million annually. To get to break-even, First Ascent needs 2,500 clients paying the $500 — plus it needs to bring in subadvisory gigs on the side, for which it earns an AUM-based fee at higher levels.
An unforeseen market that First Ascent is tapping is do-it-yourself RIAs who were never willing to outsource before at the rates available on the market. But at a flat $500, it is a compelling value to them. MacKillop says he hopes to eventually distribute by using SMA platforms like Chicago-based Envestnet Inc., but that his firm needs to gain critical mass before the Chicago-based SMA clearinghouse will take his application.
Mean, lean Denver machine
First Ascent stretches the dollars it does have. Staffers work in a converted warehouse, sharing space with an Uber office, a yoga studio and a few dozen tech firms. See: My 10-year journey from a BoA call center to establishing a solo $73-million AUM RIA.
Too, MacKillop says his firm has used technology aggressively to slash its own costs. For instance, his firm outsourced its back office operations to Omaha, Neb.-based Orion Advisor Services LLC, which oversees portfolio accounting, performance reporting and billing. First Ascent also uses Orion’s system to provide an advisor portal. First Ascent handles trades and rebalancing on Orion’s own system. See: The four-year ordeal Orion’s president underwent to launch Eclipse — a sprint to stay in the race with Tamarac and Black Diamond for rebalancing.
MacKillop hopes to reach $100 million in assets by June.
“We don’t have people who get on airplanes and buy advisors steak dinners. We’re trying to incorporate a business model that doesn’t incorporate a wholesaler model.”
MacKillop doesn’t use stocks and bonds in his separate accounts strategy. Rather, he focuses on ETFs and mutual funds. First Ascent also offers tax management which includes tax-loss harvesting for all portfolios. About 75% of the portfolios are passive; 25%, active. Strategies include popular investment options such as funds from Vanguard and iShares. See: Schwab snares its first clients for ETF-only 401(k)s as one of its 401(k)-focused RIAs defects to TD Ameritrade.
MacKillop has so far received four significant yea votes from financial advisors voting with their feet. When he left Frontier to form First Ascent in 2015, he took all four staff persons in the Denver office with him. See: How exactly I started a specialized RIA for under $10,000.
“I left Frontier because I had differences with a couple of my partners about the management and direction of the firm,” he says. “They paid me a fair price for my ownership in the firm and I moved on to implement some of the ideas at First Ascent that were not of interest to my partners.”
Executives at Frontier did not respond to multiple email requests seeking comment for this story.
First Ascent began offering services to advisors in 2016. Currently, the firm employs nine advisors and staff. “Although we are a new firm, the individuals at the firm are not new to the business and most of us have known each other and or worked together before,” MacKillop says.
Flat but flexible
RIAs are craving low-cost pricing when it comes to separate accounts, says Dennis Clark, managing director of Denver-based Shelton Capital Management LLC, which manages $1.83 billion in assets.
Previously, Clark was president of Advisor Partners from 2001 to 2011, a firm that tried to do something similar to what MacKillop is attempting — namely putting passive investments inside an SMA wrapper — but with a more traditional fee structure. See: Hard numbers that show the zero-sum advantages of RIAs over wirehouse brokers as told by fund flows.
“First Ascent is responding to the need for advisors to set themselves apart and distinguish themselves in a competitive environment… Scott has the experience and skill to manage the firm’s costs to offer such pricing and make a profit as well,” Clark says.
For a flat annual fee of $500, MacKillop’s firm will manage a client’s assets for advisors. The average account size is about $250,000. Certainly, this structure favors larger accounts. For instance, a client with $50,000 would be paying 1%, whereas a client with $700,000 would be paying just .07%.
But MacKillop is willing to be flexible. “If someone doesn’t think a $500 flat fee is fair for a smaller account, we’ll charge 50 basis point and cap the fee at $500.”
“What we found was everyone liked the concept of not having the fee go up endlessly as assets went up,” MacKillop says. “We started experimenting with the flat fee last year to see if we could get new business.” See: Which type of AUM is worth more to a buyer?
Once the flat fee gets RIAs in the door, MacKillops says it’s First Ascent’s service and portfolio management that will keep them inside.
Robo-like but not robo
MacKillop acknowledges that robo technology has made his firm’s stripped-down operation possible.
First Ascent holds its assets with Jersey City, N.J.-based TD Ameritrade. The firm handles account openings electronically.
“There is a robo quality to us. We’re focused on costs. We’re also reliant on technology for our ability to do this. If we couldn’t outsource this to Orion, we couldn’t do this. We just want to have solid long-term portfolios that are low-cost for people and we can charge in a way that’s very different for our industry.” See: The three big defects in Andy Rachleff’s theory of robo-advisors’ ineluctable destiny of domination
But MacKillop says his firm offers much more than a robo.
“I would argue that our portfolios are better. We have a set of ETF-only portfolios too, but we also have portfolios that can combine active and passive management styles. We can suggest any ETF in existence and aren’t limited to a narrow universe like robos.” See: Why Valerie Brown is doing 19-whistlestop tour with her new CEO to sell — ironically — deep price cuts and a TAMP-for-millennials.
First Ascent’s service model superior to that of robo-advisors, MacKillop argues. “The original robo business model was designed to avoid human interaction. We are investment and service-oriented, where robos are technology focused and just learning about what a real advisor-client relationship consists of.”
Sold — for now
Andrew McFadden launched Panoramic Financial Advice in August 2014 and mostly works with young professionals on an annual retainer fee. With that under $10 million in assets, the Fresno, Calif. firm is more focused on providing investing strategies for clients than managing assets.
When clients do want their money invested, McFadden primarily uses First Ascent — and the flat fee was the deciding factor. “It was the pricing model and the flat-fee model they’re pushing.”
The question is whether First Ascent can maintain profits long-term.
“It’s definitely a risk but if you structure it right then you can make it happen and I think he sees that. They’re seeing the run rate which will allow them to project and make it work. They’re very smart people and they’ll figure it out,” McFadden says.