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 last Wednesday.
“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 Mr. Tomczyk characterized further merger opportunities as rapidly fading. “We're in the seventh inning of a nine-inning baseball game on the trading side,” he said at an investors' conference sponsored by Citigroup Inc.
Mr. Tomczyk declined to comment directly about 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, he 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 have waned, TD Ameritrade has been focusing more on gathering assets through its RIA custody channel, Mr. Tomczyk said. It is 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 [advisers] -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” because existing relationships are hard to unlock, he said. However, larger advisers tend to use more than one custodian, giving TD Ameritrade the ability 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 $590 billion from about 6,000 advisers at Schwab, according to recent disclosures from the firms.
TD Ameritrade began working with clients of RIAs when trading-focused Ameritrade merged with TD Waterhouse in 2006. Growth stalled, however, because of difficulties in integrating the firms, and problems with a later acquisition of Fiserv Inc. As a result, TD Ameritrade's market share with RIA clients hasn't grown in any material way, Mr. Tomczyk said, though the custody unit is now on track and increasing its asset gathering.
That is important because the stock market appears to give firms that gather assets from wealthy investors a higher valuation than those more focused on transactions. The price-earnings ratio 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 said, TD Ameritrade's profits have benefited from a technology-oriented trading model and arm's-length relationship with TD Bank, which give it expense advantages over rivals such as Schwab that must allocate capital to its bank and to more personnel-intensive service costs, Mr. Tomczyk said.
E-mail Jed Horowitz at jhorowitz@investmentnews.com.
