Expert Interview with James Osborne About Flat Rates And An Unbiased Approach

Sometimes it’s hard to know who to trust in the world of finance. You don’t know whose hands are in whose pockets, or if the financial advisor even has a vested interest in your portfolio. It can be difficult to get an unbiased, expert opinion. That’s where Colorado’s Bason Asset Management comes in. Bason Asset Management’s founder, James Osborne, took a moment to tell us about flat fees and the importance of an objective perspective. Who is Bason Asset Management? How did your firm get started? Where are you based out of? What separates you from the other financial management firms out there? Bason Asset Management was started in 2012 to offer comprehensive financial planning and investment management services to clients who valued an independent perspective and found a flat fee structure to be an attractive alternative to asset-based management fees. The office is located in Lakewood, Colorado, a western suburb of Denver. Unlike many traditional brokerage firms, Bason does not receive any compensation or revenue-sharing from mutual funds or brokerage houses; and does not accept commissions for investment trading or insurance products. Additionally, rather than charging fees based on the size of a client’s portfolio, Bason operates with a flat annual retainer fee of $4,500. What are some of the other arrangements that are out there besides the flat fee? Why did you decide to go this route? The most common arrangement for compensation of a financial professional in today’s marketplace is for the advisor to charge a percentage of assets under management. While this is meaningful step forward from commissioned product sales, it is not without conflicts. It has long been my experience that many clients seeking the advice of a financial professional have the same major issues to discuss: retirement planning, college funding, tax planning, wealth transfer, debt strategies, charitable giving, and life, disability and long term care insurance planning. In most cases, the need to discuss and plan for these issues is not related to the size of a client’s portfolio – an investor with a $500,000 portfolio has many (if not all) of the same needs as a client with a $3,000,000 portfolio. As a result, it did not make sense to me that a client with a $3,000,000 portfolio would pay nearly six times as much for financial advice than a client with a $500,000 portfolio. There are also some subtle conflicts with the assets-under-management (AUM) fee model. If an advisor is compensated based on AUM, that advisor has an incentive to retain those assets and gather any other assets the client may have. So an outside 401(k) with low costs and good investment options is often recommended to be rolled over, since it increases the advisor’s revenue. On the other hand, paying off outside debts such as a mortgage may be discouraged since it directly reduces the advisor’s revenue. The flat retainer fee is an attempt to neutralize some of these incentives, and it allows us to have an honest and frank conversation about the costs and value of professional advice. You firm’s philosophy is based around “low costs, passive (index) investments, tax management and fair dealing with clients.” First of all, what do you mean by passive investments? Why would people want to go this route? Secondly, can you give us an example of fair dealings with clients, and what are some situations where they might not get this fair dealing? The goal of a passive investment strategy is first to reduce the headwinds that so many investors often face in investment fees and taxes. An actively managed mutual fund is one where a portfolio manager is trading stocks or sectors in an attempt to outperform the broad market. The average internal expenses of these funds is often greater than 1.25%. Because the manager is actively trading, there are additional brokerage commissions and bid/ask spreads borne by the fund that can range from 0.75%-1.44% (depending on which study you choose to reference). On top of those fees, investors who own mutual funds in taxable accounts have been proven to lose 1% in return per year to the IRS as a result of the inefficient taxable nature of mutual funds, which are required to pay out any realized gains each calendar year. A passive strategy, which involves buying a fund that replicates a broad swath of the market, minimizes costs and minimizes trading activity; and is able to provide investors with access to the marketplace at a much, much lower cost. Internal expenses can be as low as 0.05%, with minimal internal trading costs and, especially with ETFs, a much more tax-friendly structure that reduces or eliminates the amount of taxable income from gains distributed each year. Rather than racking up large fees in an attempt to “beat the market,” a passive investor will accept the returns delivered by the market and focus on keeping more of those returns for themselves by minimizing fees and taxes. The primary way this firm attempts to deal fairly with clients is to be explicit about the costs of working with me by discussing fees in terms of dollars rather than percentages. Additionally, I feel it is my role to help clients understand that most financial decisions, be they related to investments, asset allocation debt or insurance, have trade-offs that must be made. It is generally not my role to sell a certain product or strategy, but to help clients see all sides of an issue. You help individuals form a plan based around specific and personal financial goals. How should people define and decide these goals for themselves, and how might it affect their savings? Evaluating one’s personal financial goals is a very important step, but first we must define those goals! This first step is often overlooked or difficult for some people to do on their own. Do they want to retire? When? Fully retire, work or volunteer? Do they want to travel or develop new hobbies or finally pursue a long-deferred interest? Do they want to pay for college for children or grandchildren? Do they want to be charitable during their life, or give money as part of their estate? First, we must identify these priorities and then develop plans to reach our goals. When helping people prepare their retirement portfolios, you help them to identify asset classes appropriate for their portfolios. What are a few of these classes, and what might make one attractive over another? Once a client has identified their goals and built a plan around them, we will begin a conversation about how to design an investment portfolio and a risk profile appropriate for them. It has been my experience that nearly all clients need some mix of stocks and bonds to be appropriately diversified. From there, we will discuss exposure to US and international stocks and whether the client understands and is comfortable with a strategy built around risk “factors” that often involve tilting a portfolio toward small and value stocks. You also conduct due diligence for investment options. What does this due diligence look like? How might people apply this diligence when watching over their own investments and handling their own plans? As an investment manager, it is my responsibility to conduct thorough due diligence on investments recommended as part of a client portfolio. In using passive or index fund strategies, the priority falls to a few key factors: What is the cost of the investment, from expense ratios to trading costs and, for ETFs, bid/ask spreads? Does the investment efficiently provide access to the market or sector we want as part of the portfolio? Is the investment tax-efficient? Other questions include: For an index fund, does it have low tracking error and a strong replication methodology? Is the company behind the investment (such as a mutual fund or ETF) reputable and stable? Are the low expenses sustainable? Remember that the goal of a passive investor is to build a portfolio which can be owned for a very long time with minimal turnover. We are trying to design a portfolio of investments to own for the next 20+ years in many cases. Bason Asset Management researches investment alternatives along with the investments people already hold. How do you go about finding these alternatives? Have you noticed any that were performing particularly strongly and steadily? I do not recommend what most consider to be “alternative” investments. Many of these strategies are ultimately a very expensive way to own other assets (stocks, bonds or real estate). The investing public is always searching for silver bullets – some asset that will give them great returns with little to no risk. It has never been my experience that these investment options exist. Risk and return remain close cousins when evaluating all investment choices. What are some solid investments for people who are just starting their retirement plans now? Beginning investors building a retirement portfolio at a young age should build simple, low-cost, well diversified portfolios of index funds. This can be as simple as a target-date fund from companies like Vanguard or Blackrock, or a portfolio of high quality bonds, US stocks and international stocks that can be built with just 2 or 3 mutual funds. Simplicity in investing can help many people stick to a long term plan and focus on things in their control (such as taxes, fees and their own personal spending) rather than worrying about the daily gyrations of the stock market. Why might people want to consider having an asset management firm like Bason Asset Management rather than trying to handle their retirement funds themselves? I believe that a good financial advisor can offer value in a few specific ways for investors. First, many investors will simply decide that they do not want to manage their own portfolios because they do not want to take the time, do not have the understanding, or simply do not like finance. Many investors will hire a professional after they have learned (sometimes at a large price) that they do not have the temperament required to stick to a long-term investment plan in the face of wildly volatile markets. Keeping investors from making a big mistake in the face of a frightening bear market is job #1 for many advisors. In addition, many investors will find value in having an independent, unbiased consultant “on their team” to discuss not only their investments, but all aspect of their financial lives. For this reason, I strongly encourage investors to seek a Certified Financial Planner professional when receiving financial advice. For more updates, like Bason Asset Management on Facebook, and follow them on Twitter.