AJ: Well, as a former stockpicker myself, when you’re an analyst or a fund manager, people react to short-term news. There’s often a knee-jerk reaction amongst investors when something that seems less-than-positive comes out. Most of our competitors are strong, smart operators, and they will figure out how to stay in the game. Maybe we caught them a little bit by surprise.
KM: Maybe. It was also a slow summer news day.
BM: People said, “Free? What’s the gimmick?” People said you were going to make money on securities lending and all of these things that turned out not to be the case. Why does it make sense?
AJ: It’s very challenging to make money on small accounts. The benefit seemed worth it.
KM: Index funds are essentially commodities. They’re very low cost to start with. So taking the leap and going from 0.03 [percentage-point fees] to zero is not that big a leap, right? That’s No. 1. The second thing is, we have given a lot of things for free. We don’t say, “Free financial planning,” but it is. It’s part of our overall value proposition.
AJ: I think there’s a fundamental challenge in our industry. Our core mission centers around trying to bring this complicated world [of investing] to people who are not experts in a way that they can figure out and navigate and ultimately make a plan for themselves.
One of the many things that is complicated then is to figure out how to charge for it. You can’t charge for every individual thing, because then people would never be able to understand what they were paying for or how much. Part of what you’re trying to balance here is—and the regulators certainly push us in this direction, too—is to have some kind of a fee regime that’s understandable for people.
BM: If you’re going to develop a relationship with someone, what do you hope to sell them or to offer them that they’ll eventually pay for?
AJ: I’d like to think that people will continue to pay for active management. That’s the core value proposition that we’ve been known for forever. If you look in the brokerage world, we charge very low commissions, but we give the best execution.
BM: Of the four main business lines—workplace benefits, personal investing, asset management, institutional—which is the most profitable, and which do you think will be the most profitable five years from now?