ETF.com: You’ve built a strategist business that’s quite unique by design. It relies heavily on fintech, but not when it comes to investment management. How does it work?

Scott MacKillop: We wanted to build a fund strategist firm that uses technology to keep our costs low. We’ve basically outsourced our entire back office. Where firms would normally have a portfolio accounting system and a performance reporting system and a billing system and trading systems, and so forth, we don’t have any of that. We’ve outsourced all of that.

That’s helped us keep our costs low. It also allowed us to focus on the investment management part of what we do because we don’t have to worry about the operational side of things.

ETF.com: Are you building ETF portfolios?

MacKillop: Our portfolios are core/satellite portfolios. The core of each portfolio is an all-ETF core, and is designed to replicate the global market. We then add satellites, selectively, to the portfolio.

Right now, for example, we have three satellites in our portfolios, one of those is an ETF, and two are actively managed funds.

Our target client is financial advisors who want to outsource investment management to a strategist. We serve RIAs and advisors who are affiliated with independent broker/dealers.

ETF.com: It’s not often you hear of an advisory business that outsources their entire back office. How does that work day to day?

MacKillop: I don’t know of anybody else who’s done it, but I think some of it has to do with timing. Our firm is very new. If you started a firm five years ago, I’m not sure you could have done it this way.

There are two parts to our business. The first—I’ll call it the platform part—is where we operate through firms like Envestnet and Adhesion and other platforms like that. All of these have back-office functionality. We in effect send them instructions about what our portfolios should look like, and they do all the trading, all the performance reporting, the portfolio accounting.

The second part I call the direct part of our business. If we work directly with an advisor and there’s no platform involved, then we use Orion, a firm based in Omaha. They do the portfolio accounting, performance reporting, trading and so forth for us. We just focus on our investment management work.

ETF.com: How much does this translates into savings for investors?

MacKillop: For most firms like ours, the back office represents about a third of the costs and a third of the personnel. By outsourcing, we eliminated about a third of our cost. Of course, it’s not free to outsource, but we’ve outsourced it to specialists on a per-account basis. So, it’s a variable cost, and we don’t have to bear the cost of it every day—we open up an account.

We then looked at that and asked ourselves, “What are we going to do with the savings?” We decided to create a different kind of fee schedule. Because once you get into the business of creating and managing portfolios, and you’ve basically outsourced all the back office, all you are at that point is a portfolio management assembly line. We’re just sitting here working on the portfolios, working on the models and sending in the information to our back-office service providers. If you look at the business that way, then you realize there’s no difference in the amount of cost to us for a $100,000 account or a $1 million account. They’re all just an account.

We could try a different pricing structure other than the traditional percentage-of-assets-under-management structure. So we capped our fee at a certain level.

ETF.com: That cap is $1,500 a year, correct? That’s the most an investor would pay you for your services.

MacKillop: Yes.

MacKillop: We’re trying to do a number of things differently, but yes, it’s based on the idea that we’ll need to hit probably somewhere between $300 million and $400 million under management before we hit our break-even targets. Once we get past that, the incremental cost of each piece of business is very small for us.

If you could see our offices, we’ve designed the space and our personnel to support this volume business, and tried to get leverage out of the technology that’s available to us now.

But yes, if we only get $100 million under management, it’ll be hard for us to survive. I do think that once people understand they can get portfolio management services essentially for a flat fee, the cost savings—once they translate into dollars—are pretty significant.

I’ve been in this business for 25 years. This is my fifth company. I have a lot of relationships and hopefully a good reputation in the business. And we’re counting on that to help draw attention to our firm.

ETF.com: How would you differentiate yourself from robo advisors—the Wealthfronts, the Betterments out there?

MacKillop: The difference is that we’re working with financial advisors, and there’s always a human being involved in the process. If a client uses Wealthfront or Betterment, they’re dealing entirely with an online experience. There are some sort of client service people you could call, but it’s not really your advisor.

The technology that robos have developed is outstanding, and we want to use that to help service our clients. We do use that kind of technology. We’re trying to have a paperless account-opening process, and all those kinds of things. But the advisor is still at the heart of the relationship.

So we’re supporting advisors, providing low-cost portfolio management to them and their clients, but they’re still the star of the show, as opposed to the technology being the star of the show.

ETF.com: When it comes to differentiation within the ETF strategist space, beyond your fee structure, what’s unique about your value proposition?

MacKillop: Two things. One thing that’s unusual about what we do, besides our fee schedule, is we’re trying to solve for two problems clients have. The first is they need a good portfolio. The second is they also need some information to help them overcome their behavioral tendencies—doing the wrong thing at the wrong time.

We’re developing a line of videos that are three, four minutes long, covering different topics that will help investors become better, more confident investors. So we’re trying to help not only on the portfolio management side, but on the behavioral side.

The other thing about us is the portfolios themselves. In our core/satellite approach, we’re combining active and passive strategies; that’s more unusual than you’d think these days. It’s certainly not unique, but there are very few people who combine them both without violating their “religious” beliefs. We don’t take sides on the passive/active debate.

We’re also structuring our portfolios a little differently than most today. A lot of people are loading up on multiple positions, multiple asset classes—15, 16 or even 20—and doing a lot of trading, a lot of rebalancing throughout the course of the year. We actually have done a fair amount of research and found that if you build what we call “simple but elegant” portfolios that have very few positions and rebalance once a year, keeping trading costs and internal expense ratios very low, you actually can start the year with about a 1% performance advantage, just by keeping the costs low.

We have internal expense ratios of about 14 basis points in our portfolios, even though we’re using both active and passive strategies. And the costs throughout the course of the year are just very low.

ETF.com: Are you’re talking about a portfolio of maybe five, six ETFs, each representing an asset class? Is that the approach?

MacKillop: Yes. Our portfolios now have seven positions, and four of them are in the core. There are four ETFs in the core representing international stocks and bonds, and domestic stocks and bonds. We just have three positions in the satellite category designed to add a little bit of value over the core that are relatively small, roughly 20% of the portfolio.

ETF.com: Is expense ratio a driving metric in your selection process for ETFs? How do you pick ETFs?

MacKillop: We’re objective in terms of which provider we use. We happen to own—of the seven positions we have in our portfolio—four Vanguard funds. But that’s just based on our research about which ETFs were most appropriate for the positions we were trying to put in place. We also use iShares, and other ETFs as well. But we’re trying to gain broad exposure at the lowest cost that we can get.

In the end, the core itself has an expense ratio of only 9 bps. It’s very inexpensive, and with only four positions, it looks deceptively simple. And it is, but when you look underneath, there’re over 18,000 securities, more than 40 countries, all major sectors and styles in the domestic and international stock and bond market covered. And you’ve got all the different market caps in there.

ETF.com: So you’ve built a tech-driven next-generation strategist firm that’s going back to the basics when it comes to investing, keeping it simple.

MacKillop: That’s exactly right. We’re trying to use the technology and the operational infrastructure of tomorrow, obviously borrowing a lot from what we’re seeing the robos do, and build good, fundamental portfolios we believe will provide good value over the long term for investors. We’re not taking lots of risks and making lots of bets that often are expensive and costly for our clients.

So there’s a bit of old school, there’s a bit of new school in what we’re doing.