Commonwealth President and Chief Operating Officer Trap Kloman Commonwealth President and Chief Operating Officer Trap Kloman.

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.”

“We’re encouraging them to move towards this holistic planning [aspect] of their value proposition,” according to Rooney. 

At the conference, some sessions focused on “how you deliver the customized and personalized experience that clients are asking for … at scale,” he added. “That’s really where Commonwealth views itself as a strong partner — to enable these advisors who are going in a million different directions to execute well on each client’s behalf.”

Tech Time 

Asked about the use of technology, Kloman pointed to the financial planning tool RightCapital. “We have over 500 advisors on it within one year, which is incredible. We’ve been thrilled by that engagement and the relationship.”

RightCapital has “integrated fully with us and that creates a more seamless experience for the advisor and their client to engage and improve the communication,” he said. “We are also putting more [resources] into digital engagement and automation, which is critical,” Kloman added.

The firm also plans to pilot the use of virtual assistants next year. “We have more offices who want to be in beta than we can handle, which is great. The demand is crystal clear,” he said. 

This development “is a reflection … [of the fact] that advisors have to spend their time on the high-value [tasks] and minimize commoditized functions,” according to Kloman. 

“They turn more and more of the investment management/asset allocation over to us, … and they’re focused on the clients’ needs, dreams, risks and making sure they’re pairing the right solutions to fit the unique situations of the clients,” he said. “The virtual assistants will … take commoditized administrative tasks that eat into their day and their time off their desks.”

RIA Firm 

Though some industry watchers and media sources refer to Commonwealth as the nation’s largest privately held independent broker-dealer, “The reality is where the majority of our revenue comes from is the RIA. We are a national RIA, and we’re one of the largest,” Kloman said.

“We have a brand opportunity that I’m excited about and for the marketing team to be working on for 2020. There’s a lot more to come,” he added.

(The company began referring to itself as ‘the nation’s largest privately held registered investment adviser/independent broker-dealer” in 2017.)

The firm’s executives also say they expect great things from the spinoff of its Advisor360 software unit, which has added over 180 staff members this year and now employs about 400. That business brought on MassMutual as a client in February.

(Commonwealth has roughly 85 employees for its own IT service center, or helpdesk, which is dedicated to affiliated advisors using Advisor360.)

By separating the two businesses, Commonwealth’s annual tech budget is set to expand from a range of about $45 million to $50 million up to $90 million to $100 million over the next 18 months, Kolman says. 

“We’ve quickly seen interest around the industry from several players [in Advisor360], primarily in the insurance space but not solely in it,” he said. “Its focus is, as it should be, on MassMutual and developing software for our advisors.”

— Check out Commonwealth Sees Surge in Advisors Ditching FINRA on ThinkAdvisor.