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First Ascent: A Glimpse Into the Future of Advisor Portfolio Management


By Bob Clark | March 2, 2017

Industry Press

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This isn’t a blog about flat fees versus AUM fees. Well, mostly it isn’t. It is a response to two comments posted to my Feb. 21 blog (Flat Fees Again: Hey, It’s Not My Fault!), but only one of them is really about flat fees. The other one is much more interesting. I promise.

But before I get to that, I should respond to the comment by Elliott Weir, of III Financial, who wrote: “You essentially reaffirmed my point when you stated that ‘To my mind, $1 million to $2 million portfolios are essentially the same size, and I’d expect them to typically involve about the same level of attention.’ So why does the $2 million account pay (close to, including fee discounts) 2x for that same level of attention and portfolio?”

I admit, mine wasn’t a very well-worded response. It’s certainly a fair question to ask why an advisor’s fee doubles when the portfolio doubles if the work load doesn’t double. Part of the answer came later in my blog when I pointed out that one of the advantages of AUM fees is that advisors can reduce them anytime they feel the dollar amount is getting too high: they simply tell the client their larger portfolio now qualifies for a lower AUM fee. I’ve heard that such a reduction can really make a lasting impression on a client.

More important IMHO (and I don’t think this can be overstated), is the “identity of interest” created by an AUM fee (being the opposite of a “conflict of interest.”) As every advisor knows, long-term buy-and-hold investing is a difficult concept for most retail investors: particularly during down markets. Heck, I’ve read all the supporting research, and it’s still difficult for me.

And I think I speak for many investors when I say I like the fact that my advisor has skin in the game, too: and I don’t mind a bit that she makes more money when my portfolio grows. In fact, I wish more of my professional relationships were like that: for instance, that my cardiac surgeon got paid for every year that I don’t need another ablation; and my Harley mechanic got paid for every mile my old Road King keeps rolling down the road.

The more interesting comment (at least to my mind) came from Scott MacKillop, who wrote about the approach followed  by his firm, First Ascent Asset Management.

“My firm provides outsourced portfolio management services to financial advisors and their clients. Every firm I know of in our business provides their services on a percentage of AUM basis. We manage portfolios for the clients of financial advisors for a flat fee of $500 per year no matter how large the account. This is a clear benefit to the end client, especially those with larger accounts. A client can save thousands of dollars a year under this fee structure. Advisors benefit too by being able to offer their clients professional portfolio management services at a very low price without having to lower their own fee.”

This comment had me scratching my head trying to figure out how Scott and his team make any money at $500 per year per investor without having Vanguard’s millions of customers. So I called him in his Denver office to find out how he does it.

My first impression was that Scott’s a friendly, bright, articulate guy, with loads of financial services experience. He’s a securities attorney who’s worked at the SEC and then in private practice for 15 years in Washington, D.C. He went on to serve as president of ADAM Investment Services in Atlanta, and then president of Denver-based PMC. He then became president of U.S. Fiduciary Service in Houston, and then president of Frontier Asset Management. It’s fair to say that he knows the financial services business.

Second, though he’s weighed in on the discussion, his firm really has nothing to do with the AUM vs. flat fee advisor compensation debate. Yes, First Ascent offers portfolio management for a flat annual fee, but to advisory firms and only through them to retail clients. While some of his advisory clients pay First Ascent’s $500 annual fee out of their own flat fee, others pay the $500 out of their AUM fee. So what MacKillop and his team are really offering is access to high-quality, low-cost client portfolios that allow independent advisory firms to eliminate their own expensive, time-consuming portfolio management for $500 a year per client.

On a more macro level, MacKillop is providing technology supported, sophisticated, human portfolio management that competes on pricing with the robo platforms, but without their overly simplistic investment algorithms, and all-too-common conflicts of interest.

“We set out to create our model portfolios the way sophisticated asset managers do,” he told me. “We use very low-cost core vehicles such as index funds and ETFs, but then reduce risk by adding in some high-quality, actively managed ‘satellite’ funds that use sound investment processes. We base our portfolios on the work of Harry Markowitz, Bill Sharpe and others, seeking global diversification, with an eye toward minimizing taxes and expenses (by rebalancing annually), and a focus on the future, rather than the past.”

While First Ascent may not offer much insight into the question of AUM fees vs. flat fees for advisory firms, Mackillop and his team do offer cutting-edge solutions to today’s challenges of margin compression, robo platforms and breakaway brokers and downward pressure on advisory fees.

In other words, the real issues facing independent advisors.