In Financial Planning's annual FP50 survey, Commonwealth Financial Network consistently stands out for its high percentage of fee-based revenue. Now the No.4 independent broker-dealer has rolled out a new advisor model: an affiliation that gives advisors access to Commonwealth's technology, investment platform and practice management services, along with Fidelity's custodial services - but still lets them operate independently.
"Why do I want to shrink the top of the sales funnel?" CEO Wayne Bloom replies when asked why the firm created the new model. "I want quality advisors who are investor-centric. How they're affiliated - it just doesn't matter to us."
Bloom sat down to discuss industry shifts, advisor models and Commonwealth's future. Here's an edited version of the conversation.
What industry changes are most affecting your advisors?
I think regulatory reform will continue to play a pretty big role. Historically, you've seen the regulatory pendulum ebb and flow. But it keeps getting faster and more demanding, and I think that places increased burden on Commonwealth and our advisors. The intent, obviously, is to make the investment community more secure to increase investor confidence. But that's the environment we live in, and we have to comply.
The graying of America provides some challenges, whether it's the advisor or the clients - income needs, changing health needs and making sure their estates and affairs effectively pass to their heirs. Advisors also need to build relationships with the next generation. And that next generation behaves very differently from the existing client base. They view the markets and they view financial advice very differently from some of the existing clients. Really, the most important thing for advisors is building those relationships. I think a lot of the folks in the next generation trust their PDA more than they do people in the financial community. We have to adapt to that reality and make sure our advisors are up to speed on the web and participating in social media.
Were regulatory issues the reason for the new model?
I would say that was primarily market driven, but there are certainly regulatory elements that are driving the market. It might be a decade or more before the SEC can physically get to an RIA audit. So I think some advisors view that landscape as a way to lessen their regulatory burden.
We lost an advisor many years ago - a long-standing Commonwealth advisor, who was primarily fee based. He lives on the South Shore of Massachusetts, and every Friday in the summer, he takes clients fishing. When the client catches a great fish, [he] takes a picture and wants to post that picture on his website. We had to approve that picture.
Now I understand, in the bigger picture, why Commonwealth would need to approve things that go on one of our advisor's websites - but that was the tipping point for him. He said, "This environment isn't conducive for me operating my business efficiently." So he left.
What were other reasons for the new model?
One was a retention strategy - our existing advisors were asking for it. They were saying, "Look, we love you. We're happy with our financial arrangement. But we don't want to have our FINRA registration any more." Also, the recruiting environment is very competitive. Why do I want to shrink the top of the sales funnel? I want quality advisors who are investor-centric. How they're affiliated - it just doesn't matter to us.
We're really an independent technology company that's also a giant RIA and which, by the way, also happens to be an award winning broker-dealer. Some 70% of our revenues recur.
Did you intentionally focus on fee-based business?
Well, it's funny. Joe Deitch started the firm in 1979. And he had this neat idea: "Suppose I, for my clients, buy no-load funds, and charge them 1% a year to manage the money." And it fell flat because the infrastructure wasn't there. There was no easy mechanism to debit fees or consolidate the reporting - it just didn't work. But we always had affiliated RIAs who'd charge fees.
We started Preferred Portfolio Services, a fee-based asset management offering, in January 1996. At the end of that year we had a whopping $25 million in the program. But then the next year, we had $100 million, and then we had $300 million - and now it's almost $40 billion.
I made my biggest mistake when we rolled this out. We positioned it as great infrastructure, great features - you can earn 1% per year, and annuitize your book. But Commonwealth advisors were not getting excited. Then we turned it and said, "These are all the reasons it's great for your clients." And then as soon as we did that, the business started to take off.
What are you doing to bring in new advisors?
We're putting a lot of effort and resources into helping our advisors bring the next generation into their practices. I can't really bring in newbies; it's not how our business works. We want them to come in and be mentored by seasoned Commonwealth advisors. We also have a mentor program that helps advisors bring the younger people along.
Diversity, I think, is an issue. I'm not exactly sure how to address it. Three of our partners are women, and a lot of our senior staff are women. I'd like to tell you it was a conscious decision - but we wanted to promote the best people, and half the best people on the planet happen to be women.
Explain how the firm's ownership is structured.
There are 11 partners at Commonwealth. We all have equity positions in the firm. Joe, being the founding partner, still owns the majority, and his family holds the majority of the stock.
Every employee has stock options. They get an initial award that vests on their second anniversary, and every July we give out additional shares. We want everybody thinking like an owner. We do not offer ownership externally to advisors or other parties. It's something we've kicked around from time to time, but at the present time we are not offering it.
Are you looking at deals or strategic partnerships?
I talk to people all the time, as you might imagine - private equity, venture capital. I always talk to them; I always learn something. But I've never had a meaningful discussion about selling part of Commonwealth. We have no debt, we have no external ownership.
That may or may not change in the future. What we always promise to do is the right thing for Commonwealth and its advisors.
Rachel F. Elson is executive editor of Financial Planning.