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.”