One of our differentiators is our fee reduction program. In this and subsequent postings, I'll outline the design and implementation of the program.

Our costs for managing a $10,000 account and a $150,000 account are not that different - it seems only fair to share the benefits of scale with the larger unitholders. Over time as our overall business scales we hope to pass on the benefits to all unitholders, but that's another story.

Philosophically we want to reward our larger unitholders, encourage them to stay, and (to be honest) attract more assets.

Differentiators
Of course every high net worth counseling firm has a low fee structure or fee reduction program; however, we think we're different because:

• we start providing fee reductions at a much lower dollar amount, $100,000
• we reward tenure with the firm

Issues
We (well, Tom and I) naively believed that implementing the program would be relatively simple, but as we work through the processes and systems for the business we came across a number of issues. Note that this posting is not official policy - we're still working out the details of the program design and the rules may change at any time.

Some of the issues we came across were:

• grouping of accounts - the plan works by determining total assets under management and then determining a percentage fee reduction to be allocated to all of the accounts in the grouping. The key issue here is determining which accounts can be grouped together. We ultimately decided to only allow grouping for:
  1. accounts owned by an individual
  2. couples who have signed up to receive consolidated statements at the same mailing address. The idea is that they make their investment decisions together and have allowed each other to see their respective holdings.
• how do we reduce fees? - we considered different fund classes but ended up deciding to reduce in the form of distributions. Each class of units has additional fund accounting and valuation costs associated with it, and moving units from one class to another for the sake of lowering fees could trigger tax consequences. It was simplest to reduce fees in the form of management distributions given back to the unitholder.
• quarterly vs. daily accruals - initially we thought we would simply take the total AUM for a group at quarter end, calculate the fee, and then distribute back units to each account/fund combination in the group. The problem is that over the course of the quarter there may be different accounts in the group (for example a couple gets married), or an account may be transferred out. We need to track the total assets each day in the grouping of accounts, determine the reduction owed each day, and accrue over the quarter. In the case of a transfer out we can then pay the management distributions immediately.
• direct vs. indirect clients - as we have limited information on clients who are unitholders via third parties (e.g. discount brokers), we don't have the ability to group accounts and only calculate the fee reduction on a per-account basis.
• form of reduction - we only pay out reductions in the form of distributions of additional units to the unitholder. Cash distributions would be too costly to administer.
• getting locked in to a plan that just isn't working for us our the unitholders - the simplified prospectus allows us to change the plan at our discretion; however, we obviously do so at the risk of angering customers.

In my next posting on this topic, I'll discuss the mechanics of how we will implement the program.