Eliminating the Middleman

Issue 29: August 2021

In my last issue, I began exploring what makes SCP different than other RIAs (Registered Investment Advisor). In that issue I highlighted how I can provide greater transparency. I want to continue on that theme this week by highlighting the other aspect of my structure that differs from other RIAs. Mainly that my structure allows you to save $$$.

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The biggest thing that differentiates SCP from other firms is my structure. Specifically, I do not outsource any active investment strategies to third parties. Instead, I offer everyone access to the Spring City Fund, which is a concentrated portfolio of individual stocks, at no additional cost to my investors. If we look at this charts from last issue we can see how SCP’s structure can provide meaningful savings to you.

As we can see in this chart there are a multitude of layers between you and the actual investment decisions. More importantly, these third party managers charge fees in addition to what you pay your advisor. By offering the Spring City Fund at no additional cost, you could save >50% in Total Cost of Investing (TCoI).

Before we go any further let me explain what TCoI means because I made up the acronym. A typical agreement with a financial advisor contains two layers of fees: Explicit and Implicit. The explicit fee is negotiated between you and the advisor. Usually contracts are based on a percentage of Assets Under Management (AUM) with ranges between 0.75-2.00%. At SCP, my fee is upto 1.50% of AUM.

Unfortunately your fees don’t stop there with a typical RIA! This is where TCoI comes in to play. TCoI incorporates both the explicit fee paid to your advisor PLUS the implicit fee to invest in the various strategies that make up your portfolio.

Advisors deploy your AUM to third party investments via ETFs, Mutual Funds, Private Equity, Venture Capital, Hedge Funds, etc. These vehicles select the actual companies you invest in and require a commensurate fee for this service. The cost for active strategies averaged 0.66% in 2019, however, many established funds charge even higher amounts. For example Fidelity Contrafund charges 0.86% and has $144b in AUM.

So determining your TCoI when working with a typical advisor includes both your fee to the advisor and the fees on the underlying investments. For simplicity sake, let’s assume your advisor charges you 1.00% and you pay 0.66% in fees for the underlying investments. Your TCoI is 1.66%.

If you have $250,000 in AUM and it is going to grow at 7.0% per annum over the next decade, then eliminating the implicit fee could save you ~$25,000 over ten years. Equivalent to 10% of your initial investment!

I think it is really important to think about this if/when you are evaluating working with an advisor. You are entrusting that individual to manage your assets. Something you have worked incredibly hard to earn. Rather than trying to maximize my fee and get two bites at the apple, I am trying to pass along those savings to you. My hope is that decision fosters trust and confidence in me.

Want to learn more about SCP, what makes me different, and how we can work together to both grow and save your money? You know where to reach me.