““I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I -
I took the one less traveled by,
[And that saved everyone a ton of cash].”
”
It’s certainly possible to talk “cost” to death. In most businesses, cheapest doesn’t mean best. But in the 401(k) space, costs are inextricably linked to performance, and thus value. The simple reality of compounding interest proves this through and through. A mere 0.50% difference in fees erodes 5% of portfolio value after ten years, and 9% of value after twenty years. Imagine the impact across a $26 trillion retirement industry!
In the last decade, the industry has felt pressure to deal with this fee problem—be it regulatory, legal, or pressure from increasingly educated consumers. Retirement plan advisors, however, have avoided intense fee compression. Instead, a war on pricing has been waged between record-keepers, fund managers and, TPA’s— allowing the advisor community to tell their clients, “Look at the cost we’re saving you,” with little or no reduction in their own fees.
After decades in the asset management business, we launched Marcado, structuring our service and fee model in a way that challenges the inefficiencies of the current industry cost structure, while not compromising the quality of our advisory service. And, frankly, we think it’s time for a few more advisor firms to take a similar “road less traveled” because it just might make all the difference. Following are three key tenets of the Marcado model, and the ensuing results felt by our clients.
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Tenet 1: Fees should be based on hours worked. We back into the fees we charge, starting with an estimate of how much consulting work a plan will require. Then we apply a fair hourly rate and bill flat fees on a quarterly basis. It’s just more simple and straightforward.
Tenet 2: Flat fees are most reasonable. Financial advisory to retirement plans has an inelastic quality by nature. That means as a plan grows in assets the work involved does not grow at the same rate. Charging a fee based on a percentage of assets means the plan cost increases unnaturally relative to the work involved. Some will argue that an increased fee is justified with larger plans given increased risk alone. We beg to differ. The DOL has clearly outlined fiduciary risk mitigation processes and procedures. We do what the DOL tells fiduciaries to do.
Tenet 3: The ability to charge lower fees starts with an efficient advisory model. Advisors are not custodians holding retirement investments. Our clients are hiring us to deliver our expertise and decades of industry experience. So contrary to some industry thinking, a leaner advisory firm doesn’t mean inability to service large plans or mitigate risk on a large scale. The best consultants stay efficient and deliver on-the-ground expertise to their clients.
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Structuring our business model in such a way allows us to deliver excellent service to our clients at a clear, sensible cost. Following are some specific outcomes for our clients.
Outcome 1: We are always a net cost-saver for our clients. Even for smaller plans, we structure our own fees and manage the entirety of plan cost structure to put more dollars in the accounts of participants. For plan overhauls we’re net cost savers to clients immediately. For non-overhauls it may take more than one year but we get there.
Outcome 2: We average 25-50% savings on the industry averages. This is based on our flat fees charged year one, and which stay flat.
Outcome 3: We’ve written a fee cap of $30,000 into our ADV. That means no matter how big the plan grows in assets we stand behind our belief that all plans deserve the same attention. and If we’re doing our job, the risk mitigation steps are similar at $10 million, $100 million, or $200 million in assets.
We believe our approach to fees is unique in the industry, but at the front end of the direction many advisors are heading. Having only launched Marcado less than one year ago, the response from industry vendors and clients has been extremely positive. We’ve written even more on industry practices regarding fees here.