Commonwealth Financial President & COO Trap Kloman

While Commonwealth Financial Network held its 40th yearly national conference in Denver in early October, Charles Schwab, TD Ameritrade and E-Trade dropped their trading commissions for stocks, ETFs and options to zero; the following week, Fidelity joined them.

Asked about the significance of zero commissions at the event, Commonwealth President and COO Trap Kloman explained that the above-mentioned firms have “a different business model” from that of the firm he leads. Some firms have to “scale where price matters and that’s how [they] compete” vs. those with “a strong value proposition,” which compete differently.

“We’re obviously very much on the value-proposition side,” Kloman said. “The challenge for us and for our advisors, though, is in the marketing of what’s going on in the industry.”

Free trading is a “a commoditized function,” which Commonwealth advisors need to address in conversations with clients while also articulating their own value, he explained. “If you try to ignore it and just let those billboards and ad campaigns mount … your relationship with your client will be at risk.”

“One of the things we’re doing more and more of … is to make sure our advisors have the resources they need to help educate their clients. We want savvy, educated clients. That leads to a better relationship long term,” he added.

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,” Kloman said.

“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. It makes them clearer,” he added.

By the Numbers

Commonwealth now works with about 1,950 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, which are about 85% fee based. As for commissions, they represent “an ever-shrinking number,” he adds.

While some businesses, like variable annuities, still are sold mainly on a commission basis, “There’s greater acceptance amongst 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,” according to the managing principal.

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” to fee based.

Another industry trend is tied to advisors getting their Certified Financial Planner designation, he says: “A lot of younger advisors are jumping right to it…,” the executive explained. “It’s a way for them to provide value in a larger office right off the bat.”

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

At the national 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 clients’ needs, dreams, risks and making sure they’re pairing the right solutions to fit the unique situations of clients,” he said. “The virtual assistants will … take commoditized administrative tasks that eat into their day and their time off theirs 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 spin-off of its Advisor360 software unit, which has added over 180 staff members this year and now employs about 400. That business brought on Mass Mutual as a client in February.

(Commonwealth has roughly 85 employees for its own IT service center, or help desk, 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 Mass Mutual and developing software for our advisors.”

Janet Levaux is editor-in-chief of Investment Advisor. She can be reached at jlevaux@alm.com.