Outside-IN

Zero-fee trading was a warning shot. Asset management is next

The advice industry's future lies in matching our fees with what our clients actually value

Oct 18, 2019 @ 1:48 pm

By Anders Jones

Over the last few weeks, we've seen broker after broker abolish its commission trading fees. Interactive Brokers was the first to reach the zero-fee finish line and the rest have followed suit, with Charles Schwab's move triggering action by TD Ameritrade, ETrade and Fidelity in a bout of game theory that would make an economics professor proud.

On a tactical level, I've heard advisers sound the alarm that zero-fee trading will feed the worst impulses of investors, and I've seen discussions about novel investment strategies that are now feasible without the drag factor of trading fees.

But when I take a step back to look at the big picture, I see the compensation structure of fees for assets under management in the cross hairs.

Yes, the stock prices of these brokerages are falling, but I really doubt they're losing a lot of sleep over this decision. Forbes reports that Schwab projects it will lose $360 million to $400 million yearly, around 7% to 8% of its revenue.

TD Ameritrade will feel a relatively greater sting, as the announcement affects 15% of its revenue — but it clearly decided the long-term benefits are worth the short-term discomfort. When companies with the word "trade" in their own names are backing away from trading fees, you know they don't see a future in them as a revenue stream.

Let it sink in. One of the most fundamental aspects of investing, the trading of securities, is now such a commodity that brokers are giving it away.

Let's be real: Zero-fee trades have been a long time coming. Robinhood broke out in 2013 by offering free trades to users. At that point, the writing was on the wall — trading was a worthless commodity and it would only be a matter of time before everyone went to zero. The latest salvos from the custodian titans just seal the deal. They decided, rightly, that the cost does not match up with the value the end client receives.

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If that's the case, where else in this industry can we find a glaring mismatch between cost and value to clients? It might not be long until the conversation around asset-management fee compression turns into yet another race to zero.

Advisers and fund managers are managing money for free, so the end of that most storied of pricing mechanisms seems near.

And this isn't a prediction in a vacuum: Our industry's reporters, thought leaders, white papers and conference keynotes have beaten the drum loudly for years about the commoditization of investment management. Advisers know, or should know, that they can no longer bill their clients a hundred-odd basis points for simple asset management as they did in the '90s.

Don't count on your wealthiest baby boomer clients to kick back and let you keep charging asset management fees just because that's how it's always been done. Your clients are smart people. Trust that they're doing their homework and looking for alternatives — and if they aren't, their children certainly are.

Our industry's future lies in matching our fees with what our clients actually value. This is exactly what Schwab, Fidelity and the other big brokers are doing by walking away from trading fees.

So what do clients value? It's what they can't get anywhere else: planning services from a dedicated human being who offers the expertise of a CFP designee and will work hard to understand their financial lives.

It's easy to articulate this value to clients as time spent by the planner. We understand the value in service when lawyers charge hourly fees, doctors itemize procedures and even when Amazon Prime provides fast, free delivery and streaming video. Put more plainly, we need to lead with financial planning, because that's what clients actually value.

Advisers know it, too: A recent Redtail survey found financial planning software to be the most frequently adopted technology, as 79% of respondents said they used planning tech.

Know what came dead last? Digital trading, at 9%.

It's hard not to see zero-fee trading as anything but a shot across the bow of AUM-based fees. Take this development as an opportunity to really examine the work you do and how you charge for it. We can either embrace our clients' evolving expectations or stand still and hope the next shot misses.

[More: Thinking beyond $1 billion]

Anders Jones is CEO and co-founder of Facet Wealth.

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