At its National 2022 conference held in San Diego this week, Waltham, Mass.-based Commonwealth Financial Network executives announced a new goal: To grow from some $250 billion in assets across about 2,000 advisors to $1 trillion, and do so largely by continuing its transformation into what executives say is really a national RIA.
“While $1 trillion is a pretty meaningful number, it’s only about four times bigger than we are today,” CEO Wayne Bloom said. “And it equates to approximately a 14% compound annual growth rate,” less than 0.5% more than what Commonwealth has achieved over the last few years.
“Most importantly, it’s growth that will be well-managed and done in sync with our mission, vision and values.”
There are a number of projects and initiatives that cascade backwards from the goal, Commonwealth executives said, and leaning further into the RIA market will be key. Already, some 80% of the firm’s assets are in fee-based accounts, as well as 90% of the flow. So far, nearly 300 Commonwealth advisors have fully dropped their Series 7 FINRA license, with the vast majority opting to operate under Commonwealth's corporate Form ADV. About a dozen advisors have chosen to register their own RIA, using the Commonwealth suite of services to support the business.
“We’re more a national RIA than we are a b/d,” Bloom said, in an interview with WealthManagement.com. The difference is a fully integrated package of services still privately owned and a scale that can deliver those services for low fees.
“When you look at where the support (for the RIA channel) is coming from, it’s typically been custodians, and then disaggregated third party tech. Now you have the private equity-backed roll-ups coming in. No one has really put together,” a fully integrated suite of support services for RIAs, including brokerage, custodial, and technology, said Trap Kloman, president and chief operating officer. As for competitors, like Charles Schwab, offering a plug and play package of tech and services to RIAs for free? "Do you really believe it's free?" said Bloom, referencing the money Schwab makes on order flow and cash sweeps.
Throughout the conference, Commonwealth executives outlined the path toward the ambitious goal, including a lowering of platform fees, offering to take a minority equity stake in the advisor shops affiliated with Commonwealth, buying out a rep’s commission-based trailing revenue to let them to drop their FINRA license and clean their books of the legacy assets, and expanding its suite of business solutions and ancillary services for the advisors, including lending, para-planning and business consulting.
“Commonwealth feels more like the RIA channel,” said Kenton Shirk, a former wealth management analyst with Cerulli who heads up a 20-person practice management consultancy team inside Commonwealth. “It’s a heavily fee-based business, and 60% of the practices are ensembles, or enterprise practices,” as opposed to solo shops or teams of advisors each running their own books of business.
During his keynote address, Kloman announced that the firm will reduce the pricing tiers on its platform by about 60%, effective Jan. 1. Commonwealth launched the platform fee four years ago, wrapping a single fee for trades in all securities for taxable accounts and IRAs.
The old platform fee ranged from as low as 1 basis point for larger accounts to 12 basis points for smaller accounts. The new platform fee structure has fewer tiers, and fees range from 5 basis points to 1 basis point, depending on account sizes.
“As we scale, we have a history of sharing economics back with our advisors,” Kloman said.
In June, the firm launched its Entrepreneurial Capital program, which includes expanded loan options for advisors, as well as an equity offer. Commonwealth will take up to a 40% stake in an advisor’s practice, which can be used for succession planning, expanding operations by buying another firm, implementing marketing and technology programs, or even for personal liquidity, Bloom said.
“Collectively, you have the best practices in the country, and we want to help you drive them to be even better. We believe so strongly in this, we’re putting our money on the table by expanding the availability of debt, and deepening our partnership by offering to become minority equity owners in your firms,” Bloom said, during his opening keynote. “Nobody ever has to leave Commonwealth to access capital for almost any reason.”
Commonwealth executives said its strategy behind the minority investments is different from some of the private equity-backed rollups; they see it as a way to satisfy capital needs of advisors, not as a way to create a new revenue stream for Commonwealth.
“I think other firms, frankly most that are going about this, they’re doing this for their own purposes. It’s another way to generate revenue. It’s a way to get their claws and control something, and advisors lose that choice,” Kloman said.
“We’re not trying to roll this up, and we’re not going to flip it and try to arbitrage,” Bloom added.
If an advisor leaves, Commonwealth agrees to sell the the equity back to the firm at the current valuation.
Part of the firm’s path going forward includes helping advisors transition their practices away from a legacy brokerage business to the RIA platform.
For instance, if an advisor has a little bit of legacy commission business, say $50,000 in trails, those become house accounts, and Commonwealth would make an adjustment to that advisor’s platform pricing in consideration. But if an advisor has a lot of trails, the firm will help move those to house accounts where clients can sign additional documentation so the advisor could still bill clients for monitoring and advising on them.
Commonwealth is also bulking up its business suite to be attractive to fee-based advisors and RIAs.
“RIAs are really looking for more suite of services and business solutions that help them organically grow with their existing clients, but also how to help attract new advisors to their business,” Kloman said. “That’s dramatically being underserved in the RIA space.”
The suite includes operations consulting, outsourcing services and the capital program. Advisors can outsource human resource services and record-keeping and reporting functions to third parties on the platform. Commonwealth-provided services include marketing, investment management, virtual paraplanning, a virtual administrator, risk and compliance functions and other technology. In 2021, the firm brought on Alexander Hansen as a senior vice president of RIA compliance. His team is dedicated to shoring up compliance support for fee-only advisors, especially those who are looking to start their own RIA, whose team of compliance staff could be on the ground in an advisor's office "within hours" of an SEC audit or inspection, if need be, Bloom said.
While many of the custodians don’t charge a fee to RIAs to use their platform, Commonwealth executives said it’s the services and support—the middle-office function—that differentiates it from other custodians and validates its pricing model. Trades may be free at Schwab, but that’s only for ETFs, equities and options, not mutual funds.
“Nothing’s free in this world. There’s no trading fairy out there that Schwab has,” Bloom said.
“At Commonwealth, the real value is us being a business partner for you,” Kloman said. “So I don’t necessarily feel us competing head to head with Schwab. I think it’s two different business models that can coexist just fine in the industry. Ultimately I feel much better about the long-term viability of our P&L, our balance sheet, because we’re being paid for the value we’re creating.”
Commonwealth primarily custodies with National Financial Services, but it will accommodate outside custodians, if an advisor asks. But the firm currently does not have a way to make other custody platforms integrate with its advisor desktop, powered by its homegrown technology platform Advisor360, now a standalone company. The firm is starting to look at other software providers that will complement its native relationship with A360.
“The reason firms like multi-custody is basically the ease of being able to acquire something else, and not have to do a ton of paperwork to move from one platform to another. It’s a one-time friction,” Kloman said, but the benefits of keeping the accounts with one custodian, in terms of data flow and ease of trading and performance reporting, can often outweigh the one-time effort to transfer the assets.
Matt Chisholm, senior vice president of RIA services and practice management, said that long-term the firm will likely move to provide that multi-custodial experience, as Commonwealth continues to help firms start their own RIAs.
“That’s where we look at potentially more technology flexibility, which then is a gateway to potentially multi-custodial experiences or just preferences. Someone wants to use a specific tool or technology that’s not part of the integrated experience—accommodating those through API technology and integration certainly starts to make our technology and operating experience on par with a custodial-driven solution.”