In early October, Charles Schwab set off a fervor in the discount brokerage space by cutting trade commissions to zero on U.S. stocks, ETFs and options. Soon after, TD Ameritrade, E-Trade, Ally Financial and Fidelity followed suit.
For investors, this is great news that will undoubtedly lead to cost-savings, but for independent financial professionals, this may generate some anxiety about the future–especially for brokers who depend exclusively on commissions. For them, the most important thing to remember is that the sky isn’t falling just yet. While no one knows exactly what this will entail for the advice industry, everybody knows that change in the financial services is inevitable, be it technological, regulatory or structural. Being an independent financial advisor is all about rolling with the punches, and with the right attitude and support in your corner, you can emerge victorious.
The trend toward fee-based business will continue
Earlier this month, Morgan Stanley CEO James Gorman reminded InvestmentNews that dropping commissions is nothing new. For years, broker-dealers have been focusing on asset management and transitioning their advisors away from commissions and into financial planning and advisory accounts. In fact, according to a Cerulli Associates report, the Registered Investment Adviser channel increased asset market share from 19.6% in 2013 to 24.2% in 2018.
We can predict somewhat confidently that lower commissions will facilitate the continued growth of fee-based business. And since many advisors have already made this move, there’s at least a well-worn path in place for those interested in the fee-based model.
What happens if commissions go down for independent advisors?
That brings us to the most important question: how will the large clearing firms react, and will they lower their ticket charges to broker-dealers?
If so, Charles Schwab, the founder of the company of the same name, told ThinkAdvisor that hybrid advisors who act as both financial advisors and brokers might have a difficult time fully transitioning into the fiduciary-minded role of advising with zero commissions. On the other hand, fee-based financial advisors will be uniquely situated to provide the most competitive service compared to other firms.
Veteran recruiter and industry watcher Jon Henschen suggested the real problem will be for the large wirehouses whose advisors may be spurred to go fee-only or to join independent broker-dealers who still offer commissions.
Fee Compression
According to Scott MacKillop of First Ascent Asset Management, zero commission trades are only the latest developments in the story of “fee compression” in the industry at large. Since the beginning of robo-advisors and the introduction of commission-free trading at Robinhood, fees have generally been falling in the advice industry. MacKillop also points to no-fee index funds at Fidelity and no-fee ETFs at SoFi and Salt Financial. In fact, according to Investment News’s 2018 Study of Pricing & Profitability, the average financial advisory firm revenue yield dropped 77 basis points in 2016 to 69 basis points in 2018.
While there is evidence fees may be dropping, MacKillop reassured that this isn’t necessarily a bad thing. According to the 2018 Study of Pricing & Profitability, even though advisor fees have declined, profitability did not. This is because technology has allowed for increased productivity and the ability to offer more competitive prices.
Change can be an opportunity
Ultimately, the increased focus on the advisory fee structure offers exciting opportunities to financial advisors. Innovative fee structures that accurately reflect the value clients can expect from their advisor will win out over outdated structures that may be unbalanced or disproportionate.
Finally, there will never be a substitute for quality, face-to-face customer service and care. The ability of independent financial advisors to make an impression and cultivate personal relationships will always give them an edge over faceless advisory alternatives. Many broker-dealers have a dedicated team of industry professionals who can work with you to craft and better articulate your value proposition to stay competitive in the race to zero.
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https://www.thinkadvisor.com/2019/10/09/zero-commissions-a-huge-deal-for-advisors-bds-henschen/
https://www.thinkadvisor.com/2019/10/09/charles-schwab-says-zero-commissions-will-benefit-advisors/
https://www.investmentnews.com/article/20191102/FREE/191109981/what-zero-commissions-mean-for-b-ds
