Fair Advisory Fees For All

James Osborne
Founder & President
Bason Asset Management

Many registered investment advisors adhere to a traditional asset-based fee structure, annually charging clients about 1% of all assets under management. But is that really the fairest way to charge clients?

No, says James Osborne, founder and president of Lakewood, Colorado-based Bason Asset Management. Before starting the firm in 2012, Osborne worked at a large Denver wealth management firm, which he describes as a "typical 1% firm." "I couldn't see the difference in the services we provided for clients with $500,000 versus the clients with $3 million or $4 million," he said.

Moreover, the firm's investment committee favored active management, which was never able to consistently beat the market. "I grew weary of promising people we could outperform our benchmarks, and then having to follow up with those same people a year later and tell them we didn't," Osborne added.

In 2012, Osborne started Bason Asset Management with two goals in mind: a passive investment philosophy using index funds and ETFs; and a flat retainer fee structure. It's worked; in just three short years, he's grown his one-man firm from nothing to roughly $100 million in assets under management.

Recently ETFR sat down with Osborne to discuss fair fees, active management and how ETFs help him serve his clients and keep costs low.

How does your flat retainer fee work?
It's fairly straightforward. Clients, regardless of the size of their portfolio, pay $4,500 a year. With that, they get financial planning services, portfolio management, tax planning, and any and all financial advice they're looking for. I consider my services to be very comprehensive, all covered under that financial planning fee.

Who are your typical clients?
My average client, if you blended them all together, is probably about 50-55 years old. Their portfolio is between $1.5 million to $2 million; that's probably the result of lifetime retirement savings. Also, sometimes there's a sale of a business asset.

An asset-based fee structure can tend to make a manager prioritize or cater to very high net worth clients, since that's where their bread and butter is. Do you find that a retainer fee allows you to help younger people, or people who may not have as many assets saved up?
Good question. I'm not sure. Do I have a number of clients who are still midcareer? Absolutely. Is that a result of my fee structure? It's possible. My average client size is probably on the larger side, however, which lends itself to people being later in life.

Quite honestly, for many of my clients, I'm significantly less expensive than a traditional fee structure, which is great for them. For some people with larger portfolios, the cost savings can be very significant. Others are just happy the fee is more straightforward and transparent.
As for me, each client provides plenty of revenue. So, by and large, everyone is pretty happy.

How do you use ETFs in your practice?
Most of my client portfolios are fairly straightforward allocations of global stocks and bonds, which I try to execute in the most cost-effective and tax-efficient way possible. Very often, ETFs are the best vehicle for that.

So when we're looking at how to get the best exposure to, say, the broad U.S. stock market, we look at what vehicle is going to give us as much coverage of the market as we can get, with the lowest expenses possible.

Breadth lends itself to very low turnover, which is also good, because it makes things very cost effective and tax efficient, and of course, the ETF structure itself is very tax efficient by design. Plus, trading ETFs at some place like Schwab or Fidelity is oftentimes cheaper than an open-ended mutual fund. So the ETF has a tendency to win out, most of the time.

Have you been using ETFs since you started Bason Asset Management?
Yes. Since day one.

Since you are a one-man shop, have you found that ETFs help make portfolio management easier?
There are some advantages, like block trading, which is an efficient money management option. Also it helps level the playing field for clients, since all clients are trading in a single order.

But from a trading standpoint, my portfolios are not very active; they're low-turnover. If I were more active, I might be inclined to say yes. But really we're talking about annual rebalancing, so I don't think there's a big delta between an open-ended fund and an ETF, when you're talking about a few trades every year.

How many ETFs do you use right now?
Maybe a dozen.

What are some of your favorites?
For simple things, like broad market exposure, it's tough to beat Vanguard. The Vanguard Total Stock ETF (VTI | A-100) and the Vanguard Total International Stock ETF (VXUS | A-99) are two products I use very regularly.

For taxable fixed income, I look for ETFs in very liquid, very-high-quality markets. So I'll use something like the Vanguard Total Bond Market ETF (BND | A-94) or the iShares Core U.S. Aggregate Bond ETF (AGG | A-98), where you'll get mostly Treasurys in a very liquid market.

So you like taking a total-market approach with ETFs.
I do. Most people probably don't need to have a Canadian oil sands ETF, or a northern European telecom ETF. I think sometimes we get a little obsessed with how thinly we can slice things. What most people need to do is capture—and keep—broad market returns.

My portfolios are very straightforward. I'm not trying to get cute with anything. It's really just about trying to get the exposure that they need and using ETFs as a transparent and low-cost vehicle to do that.

You left your previous firm because you were disillusioned with the idea of active management. So what are your thoughts on the new crop of active ETFs that have sprung up lately?
Ultimately it's probably a good thing for investors. For whatever reason, the ETF structure seems to be driving down costs, relative to an open-ended equivalent, and that's good for investors. There's also the potential for more tax-efficient trading, which will be good for investors in the long run.

But the cynical part of me thinks there's a bit of a bandwagon here. When we're talking about the difference between an actively managed mutual fund and an actively managed ETF, I'm not sure it really changes the game for the manager, at least in terms of their stated goals and trying to beat their benchmark. But if it results in lower transaction costs and lower internal costs for the investor, then great. I'm all for it.

Do you use any smart-beta or alternative indexing ETFs?
I use some Dimensional Funds, primarily in U.S. and international small-caps.

I mean, if you're talking about smart beta, you're really talking about factor weighting, or some statistical method to move away from a market-cap-weighted benchmark. And when you move away from the market-cap-weighted benchmark, most people will move toward small-cap and value, which is essentially what fundamental indexing does.

Dimensional's been doing that for a long time. So in certain asset classes, I do recommend Dimensional funds to gain access to small-cap and value risk premiums. I'm not going to call it smart beta, but it's essentially what smart beta's attempting to do.