TD Ameritrade Holding Corp. is shifting its strategic priorities to asset-gathering through registered investment advisers because the opportunity for growth in its retail brokerage system through acquisitions is disappearing, the company’s chief executive said today.
“You do worry about how much further you can go on the trading side,” Fred Tomczyk said of the broker franchise, which focuses on active independent traders and executes more daily trades than rival discount brokers such as The Charles Schwab Corp.
TD Ameritrade has been an active acquirer of other discount firms, but the CEO characterized further merger opportunities as rapidly fading. “We’re in the seventh inning of a nine-inning baseball game on the trading side,” Mr. Tomczyk said at an investors’ conference sponsored by Citigroup Inc.
He declined to comment directly on whether TD Ameritrade would make a play for E*Trade Financial Corp., the troubled discount broker and bank that has widely been touted as an acquisition candidate. In the past, Mr. Tomczyk has said that E*Trade had too many problems with its mortgage loans to make it a workable acquisition.
As opportunities to grow by acquisition wane, TD Ameritrade has been focusing more on gathering assets through its RIA custody channel, the executive said. It's a difficult market, he said, because Schwab has a dominant position, advisers tend to keep most of their assets with their primary custodian and the services and products offered by the major custodians are largely commoditized.
“I don’t think any of us have any significant’’ advantages, Mr. Tomczyk said of the major custodians. “It’s all about service and helping them succeed through technology and relationships.”
TD Ameritrade gets “good marks” in dealing with advisers who manage between $50 million and $500 million of assets, Mr. Tomczyk said, but Schwab “definitely is the big player in the billion-dollar-plus” space.
Getting an RIA to change custodians involves “beating [the present custodian] to the punch,” but existing relationships are hard to unlock, he said. Because larger advisers today tend to use more than one custodian, TD Ameritrade has been able to gain some assets on the margin from advisers with primary relationships at firms such as Schwab and Fidelity Investments.
TD Ameritrade holds about $100 billion in custody from about 4,000 advisers, compared with just under $600 billion from about 6,000 advisers at Schwab, according to recent disclosures from the firms.
TD Ameritrade began working with clients of RIAS when the trading-focused Ameritrade merged with TD Waterhouse in 2006. Growth stalled, however, because of difficulties in integrating the firms, as well as problems with a later acquisition of Fiserv. As a result, TD Ameritrade's market share with RIA clients has not grown in any material way, Mr. Tomczyk said, although the custody unit is now on track and increasing its asset gathering.
That's important since the stock market appears to give firms that gather assets from wealthy investors a higher valuation than those who are more focused on transactions. The price-to-earnings multiple of Schwab’s stock is “not lost on us,” Mr. Tomczyk said.
Schwab shares trade at a P/E of 28.2 while the ratio for Ameritrade is 18.6.
That being said, TD Ameritrade’s profits have benefited from a technology-oriented trading model and arms-length relationship with TD Bank that give it expense advantages over rivals like Schwab that must allocate capital to its bank and to more personnel-intensive service costs, Mr. Tomczyk said.
