In the past 12 months, asset managers have become the biggest buyers of robo advice platforms, aiming to blend the technology into their business to increase distribution and offer products at lower costs.
One new portfolio management services shop, however, asks a pointed question: that technology is allowing clients to get lower costs to manage money, so why shouldn’t advisers derive the same benefit?
“As technology supporting asset management has changed, so have the underlying economics,” says Scott MacKillop, founder and CEO of First Ascent Asset Management. “Charging clients based on a percentage of AUM doesn’t make sense anymore.”
Which is why First Ascent capped annual account fees at $1,500, regardless of the portfolio’s size. “It doesn’t cost any more to manage a $10 million portfolio than a $300,000 portfolio, so why should larger clients pay so much more?”
Formerly the president of two asset management firms, the Denver-based MacKillop says “the business model of the asset management industry is really archaic, given the nature of the technology that’s available to do a lot of the same things for a lot less money.”
I’ve been in financial services for 40 years now and the asset management part of financial services for about 25 years. I’ve always been in the part of the business that provides outsourced portfolio management solutions to financial advisers. So, I was kind of at the beginning of that industry and this is now my fifth company in this area. I’ve worked at a number of firms that were serving financial advisers.
Why cap the cost? Why not just pocket the expenses?
The internal logic of it just didn’t make sense. There was a part of my brain that likes things that makes sense and likes things to be tidy, and the more I thought about it, the less I could understand how we ever got to this percentage of assets under management thing. I get why people like it — if you’re in the business it produces a nice revenue stream for you. But I started thinking about what you could do in this environment where the DoL rules put a great focus on doing things a little better for clients. Certainly there’s a motivation there, but the other more selfish thing that’s involved is that this, in my mind, represents a great business opportunity.
Even though we’re capping our fees, we’re doing it in a world where when you think about it, everybody on the planet is doing it one way and now we’re doing it another way. It’s just intuitively obviously beneficial to the clients. So, we expect to get quite a bit of business our way as a result.
The good news for us is that most of our competitors really can’t respond quickly to this. It’s not like the pricing is just pricing; it’s based on infrastructure that’s been built over the years at these firms. So, if you have the big back office already built, you can’t just push a button and make it go away. If you’ve built an army of wholesalers that go out into the world to meet with the financial advisers you can’t just make that go away.
The business model of the asset management industry is really somewhat archaic, given the nature of the technology that’s available to do a lot of the same things for a lot less money.
What we’re hoping to do is get out there early and fast and take a lot of business from our competitors and hope they’re not able to respond very quickly. Even though our fees are giving up a lot of revenue, certainly on the larger accounts — and they probably are — we wouldn’t have anywhere near the basis for differentiating ourselves and drawing attention to what we’re doing if we didn’t do it this way. It’s about getting out there, making our case, and the good thing is that advisers understand this benefit and clients can understand this benefit in a heartbeat, unlike when I’m trying to explain to somebody — especially a client — why their portfolios are better than somebody else’s. It takes a lot of words to do that. People understand the fee thing right away and it’s a benefit that you can guarantee to the client every year, unlike the portfolio management part of things where I can’t tell you at the beginning if any of my portfolios are going to perform any better than anybody else’s portfolios. I can certainly tell you that my fees are going to be lower and I can really quantify the level of benefit.
How has fee pressure increased with digital innovation?
Certainly, robo advisers are bringing pressure on fees. Vanguard is bringing pressure on fees, and there are more and more financial planners and wealth managers who are going to some sort of flat fee, or tiered fee structure, which is different than the traditional percent of assets under management fee schedule. With all these pressures, ultimately asset management firms will have to respond or else they will just be left in the dust.
The only justification you could provide in this environment for charging a high fee is that you produced an incredibly good result. But the evidence is sparse that asset managers out there can produce that high of a level of alpha on a consistent basis. So there’s a large chunk of the industry that will have to change their approach to pricing or else they will disappear.
And you saw an opportunity to offer something different?
I never planned on starting another company. I had done that before and it’s a lot of work and a lot of heartache, but I was having these ideas, so I kept talking to friends of mine in the industry and the response was just universally positive. Again, I’ve been involved in the asset management business for a long time. I had my share of pretty cool ideas, but I never had the responses that I got from the ideas that are underlying this company.
In a world where robo advisers are driving prices down, we’re robo-like in the sense that we’re taking advantage of the new technology, keeping the pricing low and trying to streamline, not just the investment management side of what we do, but really trying to streamline the account opening process. We’re stealing a lot of the pages out of the robo playbook and trying to incorporate those into what we’re doing.
Robos are trying to enter the investment management world and replicate the experience there. We’re investment people that are taking advantage of the technology that can do a better job than what we’ve done. I feel like we have the advantage because we’ve worked with advisers for many years so I think we understand them better than the robos do.
What’s your take on the number of deals asset managers have done with digital advice providers?
If you really look at robo technology, there’s really nothing that’s new in terms of functionality. But what’s profound about it, I think, is just the way they’ve derived efficiency from the technology. They’ve taken what was really just a pretty creaky tape-based system for opening accounts and bringing people on board and they’ve just totally streamlined it. That’s where I think asset management firms can benefit tremendously by acquiring that technology. The people that have learned how to do that first and are in charge of dispensing that technology I think will do really well.
We’re using some of the existing technology, but we’re also building a little of our own too because some of the robo technology, as we looked at it, was too expensive for really what it was. Also, we weren’t really excited about some of it. For example, some of the portfolio comparisons that they do — a client inputs information from their existing portfolio and then it’s compared to what the robo has, and it’s a comparison that goes back 20 years. I think it’s misleading. The client’s portfolio didn’t exist for 20 years and neither did the robo’s portfolio, so it’s a make-believe, back-tested comparison.
Also, I think their risk tolerance questionnaires are not based on very good science and the idea of assigning clients to portfolios in an automated way, based on answers to 12 questions, is far short of the standard that the industry should have for how to direct clients into portfolios. So, we’re trying to eliminate the stuff that we don’t like and just keep the parts that we do like. In some cases, that means developing our own technology, and that’s what we’re going to do.
You’re optimistic about getting traction in the market?
The traditional growth model for asset management firms is to send an army of wholesalers and generate business that way. Our approach is going to be different from that. It’s not that we won’t have people who are sales people who can go out and bring in advisers. But to put the emphasis on that is really not taking advantage of technology that exists today.
So, if you look at our website today you will see lots of videos. Instead of having somebody get on a plane and fly to your office, you can learn a lot about our firm, you can lean where we came from, what we’re thinking in terms of fees, you could meet our investment team, and you could meet our outside investment committee. We’re trying to communicate with people in richer and broader ways using the internet. That, I think, will help us a lot in our growth and keep us efficient and lean and mean.
Our fee schedule is a certain number of basis points up to a point and we cap the fee. Our goal is to reach our profitability point of going to a totally flat fee on our portfolios. It will take us a while before we’re well-off enough financially to do that, but really what we’d like to do is truly reflect the fact that we could make a great margin on our activities here and charge a very low fee.
When Eaton Vance made their investment into SigFig, they said they’re not a fintech company, but an asset manager. Do you think that paradigm has to shift? Do you have to be an asset manager in fintech, or do you have to be a fintech company first?
I think one of our advantages over the robos is that we’re an asset management firm first. That’s what we do.
We’ve worked for years and years and financial advisers understand their businesses. They understand their clients and they understand what works for them, and what doesn’t work for them. I think we’re certainly using and embracing technology — with the benefit of starting today as opposed to 20 years or 10 years ago — so we are able to start from scratch and use this technology.
That’s the competitive advantage we have over the robos — they’re still doing lots of things that don’t reflect or understand or appreciate what financial advisers are really interested in. I think we have a better sense of that, so hopefully that will help us as we grow and are compared to them.