Alternatively, I might try to justify charging larger accounts more because they benefit more, in dollar terms, from my expertise as an asset manager. If my portfolios are up 10 percent for the year, the $1 million account gains $100,000, while the $100,000 account only gains $10,000. But the larger account also suffers more if my portfolios lose money for the year. What about that?
Plus, it is hard to think of another industry where the price of the product is variable depending upon the benefit it provides to its purchaser. Can you imagine buying a car and having them charge you based upon the number of miles you expected to drive each year? Or checking out at the grocery store and having the clerk say, “You are definitely overweight, so I am going to charge you $1 more for that Diet Coke than the skinny guy who just checked out ahead of you.”
Financial advisors and planners may have more justification for an AUM-based fee schedule than asset managers do. Advisors and planners meet with clients one-on-one and deal with their individualized needs. They have limited capacity and there is often more complexity associated with larger client relationships. But asset management is a business of scale.
Once my colleagues and I came face-to-face with the dinosaur that is the AUM-based fee schedule, we decided to relegate it to the dust bin of history. We use the AUM-based fee schedule for smaller accounts, but we cap our fees once an account reaches a certain size.
We charge .50 percent of AUM with a minimum of $400 annually and a maximum of $1,500. So once an account reaches $300,000, the fee never increases. A $5 million account would pay the same $1,500 that we charge a $300,000 account. This fee schedule makes sense to us and is more properly aligned with the amount of work involved in the management of each account.
Will we change the asset management world? Probably not. But we know we can change a little corner of it. This is a problem we should all be thinking about as the technology and the competitive landscape affecting our businesses rapidly evolves.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based firm that provides investment management services to financial advisors and their clients. MacKillop is a 40-year veteran of the financial services industry. He can be reached at [email protected].