Ameritrade's New Focus

Under new CEO Joe Moglia, the discount broker is r

Yet another discount brokerage house is heating up the competition for the well-to-do by shifting its client focus and donning new products and services.

Ameritrade announced last month that it's revitalizing a staid, 26-year-old structure by consolidating into two distinct business units--Private Client and Institutional Client divisions. Omaha-based Ameritrade is also building a management team of high-caliber executives from the investment business, starting with the recent hire of its new CEO Joe Moglia, a former exec from Merrill Lynch's private client division.

Ameritrade is facing the dilemma that is plaguing all online brokers these days: How to tough it out until the bull returns. Like many of its competitors, topsy-turvy markets and weak trading volumes have rocked Ameritrade. Sluggish online trades forced the discount broker to lay off 230 full-time and 120 part-time employees earlier this year. But Ameritrade is also grappling with the problem of how to offer more value-added services to attract and retain maturing clients with heftier pocketbooks.

In a bid to bounce back after tough times and capture a portion of America's growing wealth clientele, Ameritrade is relying on its reputation as a low-cost provider and technology leader. It is probably best known for its $8 trades through Ameritrade Brokerage. The new business model and beefed-up management team are designed to help the discount broker create better efficiencies and synergies between divisions.

Advisors may think a discount brokerage house like Ameritrade is the least of their worries in the area of competition; after all, it's not Charles Schwab. But Dennis Gallant, senior consultant with the Boston-based Cerulli Associates, says as more brokers like Ameritrade turn their eyes toward advice and guidance, "it means the competition is picking up." He doubts that RIAs will lose clients to discount brokers and trading firms like Ameritrade, but "competition is going to be stiffer and the independent sector should make sure their practice is running as efficiently as possible because down the road the competition may cut into their profit margins." Adds Gallant: "In the future, it may cost advisors more and take them longer to build a client base because the clients will have more options and there may have to be more education being provided to differentiate yourself."

Gallant says as discount brokerage firms enhance their technology offerings to RIAs, small advisors face the threat of being squeezed out. "As more and more competitors are offering advice and guidance, they are also adding technology services to support these efforts, and this puts competitive pressures on the providers to the RIAs--the service agents, TD Waterhouses--to spend more money on technology," he says. "As their margins get thinner because they start spending more on technology to make their services more efficient and competitive, you may find service agents focusing their efforts on servicing higher-end RIAs than on lower-end ones to cover their cost of technology and services."

Ameritrade's Private Client division is being lead by Ameritrade veteran Pete Ricketts. Vince Passione, former CEO of OnMoney.com, an account aggregation Web site and Ameritrade subsidiary, will head the Institutional Client unit. I chatted by phone recently with Passione and Mike Anderson, general manager of Ameritrade RIA Services (formerly Ameritrade Institutional Services), to get the skinny on what they have planned for the advisor market.

Passione says Ameritrade is set to help advisors with $10 million to $100 million in client assets address two of their biggest competitive issues: costly technology and the ability to leverage technology without isolating clients. "The small [advisor] is running lean and mean, and [Ameritrade's goal is] to provide them with services that are competitive," Anderson says. "We are the low-cost, bare-bones provider today." Passione believes Ameritrade has created a solution to both of those technology-related problems with its OnMoney Advisor portal, which was launched in July. The portal is an extension of OnMoney.com's consumer site. It allows advisors to set up a personalized Web site carrying their planning firm's moniker. In addition to account aggregation, the site lets advisors stay in touch with their clients through weekly newsletters and daily alerts on portfolio, mutual fund, and stock performance. And clients can also set up a bill payment service.

"By leveraging account aggregation, alerts and wireless, [advisors] can turn around and create a private banking service for someone who doesn't have all that much money to invest, and it doesn't cost [the advisor] as much because you've been able to automate a lot of the services," Passione says. He adds there are tremendous synergies between Ameritrade and the RIA business, both from the standpoint of creating omnibus relationships and creating tools: "Advisors can start offering [the OnMoney Advisor] service to their clients, who can then set up their account with us. And our aggregation product would allow the advisor to see a client's holdings and then obviously we can set up the Ameritrade relationship with the client as well on the clearing side."

Both Passione and Anderson have been developing the novice OnMoney.com since its launch last February. Part of that development, Passione says, has included the acquisition of a Reston, Virginia-based financial planning firm and its mortgage, insurance, and college education planners. As a result, OnMoney is now a licensed mortgage broker and insurance agent, he says. "As advisors use our tools to sell products, there are other revenue streams, or revenue-sharing relationships, that we can come up with."

Another recent acquisition was TradeCast, which provides order management and decision support tools to Ameritrade's broker/dealer, hedge fund and money management clients. TradeCast offers, among other things, a tool for charting the history of a stock. "I see advisors using this on their desktops," Passione says.

A top priority for Ameritrade is to provide advisors with "the tools to manage a larger number of clients so they can grow their businesses and maintain the quality of service that has been their hallmark," he says.

With the acquisition last year of Financial Passport, an online financial services portal, OnMoney and Financial Passport created a B2B relationship with Aon Financial to provide financial advice and employee benefit services to corporate clients. "When financial advisors sign up with OnMoney for benefits consulting, instead of just getting a booklet that says 'here's your Ameritrade benefits,' they get directed to the Aon Self Service Now Platform where all of their benefits information is already downloaded," Passione says.

Ameritrade not only has a bevy of technology offerings for advisors, but also has access to more than 6,000 mutual funds, and strong order execution, Anderson says. "What we've done at Ameritrade Institutional Services is really focus on the execution of the trading engine and the ability to provide the low-cost alternative to the advisors," he says. "The advisors we've approached want to make sure they're getting strong execution." Anderson says separate accounts are under review.

Advisors don't have to worry that Ameritrade will hire its own financial advisors--at least for now. "Channel conflict is something that we are very much aware of," Passione says. "It would be hard for us to compete at the same time with the advisors that we are trying to bring over to use our product. So at the current time, we don't have plans to" hire financial advisors. "When we take a look at our strategy, we think there is enough in the revenue model for us to launch our platform because of our cost advantage and to allow third-party vendors to step in between us and the customer and still make a profit."

While both Passione and Anderson are optimistic about providing top-notch technology offerings to advisors, one industry watcher says the rough economic environment of late has most likely depleted Ameritrade's kitty, leaving sparse funds for technology. "If you look at the technology advances of other firms, whether it be Schwab, Fidelity, or Waterhouse with a deep-pocket parent, it's very tough to see how Ameritrade can be successful," says Geoff Bobroff, and independent financial services consultant in Rhode Island. "Price is obviously part of the equation [when considering technology and other services], and arguably Ameritrade can be a lower cost provider. But I'm not sure that that alone can get attention from a long-term setting. And I would suspect that [Ameritrade], like other smaller discount brokerage operations, is cash constrained. If they had done this [restructuring] two years ago [when the markets where stronger], it might have helped them position themselves a bit better."

Moves by Ameritrade and other discount brokers to offer more guidance are an affirmation of advisors' philosophy of providing advice. Indeed, a recent report by the Spectrem Group found that affluent investors are less impressed by the name on the company marquee, and are relying instead on the name and reputation of the advisor. The Spectrem report found that affluent investors are moving away from traditional loyalties to financial institutions and aligning with advisors and their "open architecture" platforms, which offer investors access to an array of products and services from multiple providers. Like its peers, Ameritrade has discovered that offering cheap transactions alone won't cut it in today's tough market. Deeper ties to advisors will be critical for its continued health.

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