Charles Schwab, TD Ameritrade and E-Trade dropped their trading commissions for stocks, ETFs and options to zero while Commonwealth Financial Network was hosting its national conference in Denver in early October. The following week, Fidelity followed suit.
At the event, Commonwealth President and Chief Operating Officer Trap Kloman said advisors must speak with their investor clients about the zero-commissions development soon — or they could see business walk out the door.
“If you try to ignore it and just let those billboards and ad campaigns mount up, … your relationship with your client will be at risk,” the executive said in an interview on Oct. 4.
Free trading is basically “a commoditized function,” so Commonwealth advisors need to address it in conversations with clients while articulating their own value, Kloman explained.
Firms like Schwab and Fidelity have “a different business model” from Commonwealth’s, he says. Some firms have to “scale where price matters and that’s how [they] compete, and [other have] a strong value proposition” and compete differently.
“We’re obviously very much on the value-proposition side,” Kloman added. “The challenge for us and for our advisors, though, is in the marketing of what’s going on in the industry.”
“One of the things we’re doing more and more … is to make sure our advisors have the resources to help educate their clients. We want savvy, educated clients. That leads to a better relationship long term,” he said.
Managing Partner John Rooney agrees: “The race there [to zero commissions] is about the pricing, where we see it very differently on our side of the industry; our value proposition is much more about the [advisor-client] relationship and the advice side of the business.”
The focus of that business is “customized, personalized service,” Rooney said. “[Our advisors'] job is as much about being a [financial wellness] therapist and coach as it is about being a money manager. It’s a different industry, really.”
In wealth management, “You’re going to start to see a lot more around behavioral finance, and as we think about next-gen advisors, that’s always a big topic,” Kloman explained.
“There are certain people who are more empathetic and relationship driven, which … are going to be real core skills. [They] already are today but will be more so in the future. We are excited and think we’re very well positioned. We don’t mind that this race to zero is occurring … [and] think it shines a brighter light on the differences [between] firms,” he added.
By the Numbers
Commonwealth now works with about 1,950 independent advisors and roughly $180 billion in assets (as of Sept. 30). Its executives say it’s on track to have $1.5 billion in revenue for 2019.
“We’ve already booked fourth-quarter revenues,” Rooney said, and are about 85% fee-based. Commissions represent “an ever-shrinking number,” he adds.
While some products, like variable annuities, still are sold mainly on a commission basis, “There’s greater acceptance among the advisors of doing real estate [products] in particular on a fee basis,” Rooney added. “Alternatives are now being priced on a fee basis. We’re much further along in the percentage of our sales being fee-based in these alternative spaces than our peers, and we see that continuing.”
Though the regulatory environment “may drive that outcome,” Kloman says, the firm “still believes in flexibility when it’s compliant and appropriate, but clearly the trend is headed” towards fees.
Another industry trend is tied to advisors getting their certified financial planner (or CFP) designation, he says: “A lot of younger advisors are jumping right to it … ,” the executive said. “It’s a way for them to provide value in a larger office right off the bat.”