First Ascent Case Study (Part 2)

Since an ethical mission statement is not what enables First Ascent Asset Management (a TPAM) to offer such a low flat-fee structure, I am looking for another explanation.

A closer look at the website explains its low operating expenses. It claims to have outsourced technology infrastructure maintenance and back office functions, which can be 25-33% of the typical overhead. It shares a co-working facility rather than leasing a posh downtown office. It conducts most interactions over the phone, Internet, or website to spare travel expenses. It uses videos to introduce/sell itself to advisers. It doesn’t do expensive broker-dealer conferences.

The implication is its low flat fee is justified by these enhanced efficiencies but I think the comparison can be misleading without identifying the customers. First Ascent is a TPAM that caters to other IAs. Many IAs cater to retail clients. Retail clients will not always be sold through frugal means because significant competition from other IAs exists to get their business. I believe wealthier clients want to be treated well. They want a quarterly luncheon update or a physical office where they visit trusted advisors in person. First Ascent’s clients do not need all this, which is probably what spares the expenses.

Maybe First Ascent charges lower fees because it provides a lower-quality product than other TPAMs. Looking at its content on investment portfolios, I see platitudes that serve as boilerplate marketing:

     > Diversification. Global diversification can improve performance and control risk.
     > Objectivity. We put the interests of clients first. We avoid conflicts of interest.
     > Balance. We balance our understanding of history and research with real-world experience.
     > Elegant Simplicity. Leonardo Da Vinci said, “Simplicity is the ultimate sophistication.”
     > Low Cost. Controlling costs and expenses allows clients to keep more of what they earn.
     > Discipline. Our well-defined process allows us to better navigate both good and bad markets.
     > Patience. Success in investing takes time. We are willing to wait for our ideas to bear fruit.

It provides some historical content including renowned names in the space (e.g. Harry Markowitz, James Tobin, and William Sharpe): more boilerplate, basically. It mentions two portfolios that may be implemented at multiple risk levels and are available in tax-sensitive versions, which is nothing proprietary.

With regard to performance, I see absolutely nothing! Although past performance is no guarantee of future results, this is an insult to the financially savvy that can still learn much from trade statistics.

Unfortunately, First Ascent is not alone when it comes to omitting performance details. I will discuss this more next time.

First Ascent Case Study (Part 1)

My last career saw insurance companies “carve out” (outsource) drug benefits to pharmacy benefit managers. Having a dedicated investment manager aside from an adviser busy with many other activities therefore makes a lot of sense to me.

I have [derivatives] expertise from my years of learning, backtesting, and trading [options]. I have also studied trading system development and critically analyzed many writings on the subject. I have discussed strategies with other traders and shaken up related concepts every which way to better understand them. I feel I approach the investment arena with something a bit more advanced (e.g. “alternative”) that has a good chance to outperform.

After learning about TPAMs and sub-advisers, my initial thought was that these are people/entitles like myself.

To explore this, consider First Ascent—a TPAM whose adviser perspectives I described in my last post. They charge a flat fee of $500 per account. This is 0.50% for a $100,000 account, 0.13% for a $250,000 account, 0.05% for a $1M account… dirt cheap, in other words! This level of compensation would be unacceptably low for me.

Viewing a video on the First Ascent website from CEO Scott MacKillop suggests some complicating factors. The end client still gets charged by the custodian, financial adviser, and any relevant mutual funds or ETFs. I don’t know whether the custodial fee comes through First Ascent or the adviser. The financial adviser fee is typically a percentage of AUM. Mutual funds charge multiple fees and ETFs have an expense ratio. All these different expenses coming from different places make it difficult to ensure an apples-to-apples comparison because the total fee schedule is highly variable and hard to completely identify.

MacKillop says:

     > If you ask me why other asset management firms haven’t done what
     > we’re doing, I’d tell you I have a pretty good guess but you’d have
     > to ask them. Each business is different and maybe they’d have
     > a good explanation. I’d love to hear what they have to say.

The First Ascent mission stresses doing what’s best for their clients, building the best portfolios, and investor education: “If we do all of that well then low fees and low expenses can really make a difference.”

While all this sounds like tough, persuasive talk, my impression is that the [vast?] majority of IAs could say pretty much the same thing. I doubt any of this is truly a marketable advantage.

If it’s nothing about the pitch then what allows First Ascent to charge such a low, flat fee?

I will explore this further next time.

Outsourcing Asset Management (Part 1)

This wealth management domain into which I am trying to break is quite elusive. I have been told repetitively how “unique” and “impressive” my story is. Yet I still have no job offers, nobody asking me to sign up, and no road map to a future. At least I have gained a bit more clarity with the concepts of “TPAM” and “sub-adviser.”

Further research into these concepts crystallizes some suspicions not directly identified thus far. For a while I have believed financial advisers to be mainly salespeople. The very existence of sub-advisers and TPAMs supports this belief. While fiduciary duty means putting client interests ahead of the firm, non-trading activities like marketing and raising assets do the opposite because they help the IA business move forward without contributing to client investment performance.

Mac MacKillop at First Ascent Asset Managers (a TPAM) writes about how advisers conceptualize outsourcing. One advisor described himself as a coach drafting players for different positions. His job is to find the best player (TPAM) to accomplish a certain job (investment objective) and to hold that player accountable (hire/fire). Another advisor described himself like a general practitioner (GP) charged with caring for the client’s overall [financial] health. He makes referrals to specialists (TPAMs) with expertise in particular areas (investment objectives) just as a GP refers patients to vetted oncologists or surgeons. He described finance like medicine where nobody has the time or resources to expertly manage all facets.

MacKillop interviewed another advisor who said:

     > I explain that I cannot do both the planning and provide
     > the level of due diligence and research required of a
     > prudent investment manager, so we hire people who
     > specialize in that area.

One advisor’s perspective emphasized conflict elimination:

     > I tell them that by bringing in managers who are
     > specialists in their area I put myself on the [client’s]
     > side of the table… I get to stay objective and help
     > my client hold the managers accountable rather than
     > trying to explain away my own performance.

The implementation of external managers makes good sense for opening doors to dedicated strategies, funds, or alternative investments that may be in the client’s best interests.

I will discuss outsourcing prevalence in another blog post.

Sub-Adviser- and TPAM-IA Relationships

Last time I detailed two phone conversations I had with recruiters. Today I will continue on my brainstorming journey.

After speaking with EJ and LPL Financial last Halloween, I did some research on how to become a third-party asset manager (TPAM) and generation of a GIPS compliant track record. I will discuss the latter in a separate post.

TPAMs are sometimes a broker/dealer offering. In other words, if an investment adviser (IA) signs on with a broker/dealer then TPAMs may be available under a drop-down menu on the platform.

A fine line differentiates TPAMs from sub-advisers. A sub-adviser is hired by the IA to manage client portfolios. The sub-adviser manages assets in accordance with IA guidelines and objectives. In contrast, a TPAM is an external manager hired by the client to manage assets based on client investment objectives. In a sub-advisory relationship, the IA is responsible for the recommendation and selection of the manager. With a TPAM, the client enters into a separate and distinct contract that gives the client ultimate authority to retain or to fire. An IA may or may not recommend a particular TPAM.

The level of supervision (accountability) maintained in sub-adviser vs. TPAM relationships is noteworthy. Due diligence is the depth of investigation expected of a prudent IA to determine whether a financial arrangement makes sense. This falls under the IA’s fiduciary obligation to clients and is probably greater for a sub-adviser than a TPAM. According to one lawyer, most advisers use questionnaires, in-person and telephone meetings, and performance reports on a quarterly basis to make sure sub-advisers abide by IA guidelines and objectives. TPAMs may be reviewed on a semi-annual or annual basis with regard to performance, personnel, and overall client services.

Due diligence commonly includes manager expertise, assessment of fit between investment strategy and client suitability objectives, fee structure, disclosures, and regulatory status. The IA should also review compliance controls and specify how communication between manager and client will proceed to define expectations for all parties involved.

Sub-advisers and TPAMs are two concepts that help me to better understand XC’s hypothetical scenario where I might trade for one of their clients. In that case, I would be a TPAM rather than a sub-adviser, which is why he would not risk their reputation by explicitly recommending me. I’m sure this could change if he got to know more about me and my trading philosophy.

Brainstorming My Niche (Part 1)

It’s no secret that I am interested in managing wealth for others. The next few blog posts will review some interesting conversations I have recently had along with some related writings that could be pushing me in that direction.

On October 31, 2017, I called and spoke with a recruiter for Edward Jones (EJ). As an EJ financial adviser, my job would be to move clients into products managed centrally by their dedicated investment team. I would also do extensive financial planning (e.g. budgeting, retirement and estate planning, asset protection) for clients.

I never believed that I would be a good fit as an EJ adviser and this was quickly confirmed. First, EJ is “very conservative” and derivatives are therefore not used (I disagree with the claim that options are more risky). Second, I would only be permitted to continue managing my own account per EJ guidelines. Third, rather than concentrating on planning, which is where I believe financial advisers excel, I want to stick with my area of expertise: maximizing investment performance.

Although the phone conversation lasted only 10 minutes, he did give me some ideas for further consideration. He suggested I reach out to some independent advisers affiliated with Raymond James or LPL Financial with the following pitch: “my background is in trading options and I’m pretty good at it. Could we sit down and have breakfast/lunch to talk about what I do and what I’m looking for?” He suggested they might compensate me with a percentage (e.g. similar to this).

I ended the call thinking a niche just might exist for someone like me to trade for the big firms (LPL Financial is #1 in total revenue from 1996-2017 according to Financial Planning magazine). Eager to confirm, I immediately contacted an LPL recruiter who told me they outsource investing to third-party asset managers (TPAMs).

“What does it take to become a TPAM for LPL?”

“About $40,000 to get an AIM-R compliant track record,” he said with a chuckle.

His information was a bit dated; he was talking about Global Investment Performance Standards (GIPS).

I ended the phone call somewhat shocked at the cost. $40K might be enough to start my own IA or launch a fund. Why would I want to undertake the expense to become GIPS compliant with no guarantee of business thereafter? It seemed like I might be headed toward another dead end.

I will continue next time.