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Practice Management > Building Your Business

Part: 2:Small World

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Ameritrade is doing something really different: targeting small advisors that none of the other custodians want. Bear Stearns, Merrill Lynch, and Raymond James have all entered the RIA custody business over the last year or two, but only Ameritrade is saying it wants the pipsqueaks.

“Everyone is going upmarket,” says James Wangsness, who is in charge of sales at Ameritrade’s Institutional Client Division. “So we are focusing on advisors with under $50 million under management and as little a million or two in assets.”

The advisor divisions of the three biggest custodians to RIAs–Fidelity Investments, Schwab, and TD Waterhouse–all have a preference for larger advisory firms. Servicing small advisors is expensive; they often demand the most handholding, yet have the least in assets. Schwab, the custodian with the most experience with RIAs, a little more than two years ago reorganized its service desk and quit serving small advisory firms based on their geographic location. Now, all are serviced by one desk that specializes in “growing practices.”

Advisors say that all of the custodians give better deals to larger RIAs, and you can’t blame them. The custodians have operating efficiencies with bigger RIAs. It’s just good business.

Now, along comes Ameritrade, with claims that it can work more efficiently with this hard-to-serve sector. “Because of our cost structure, we can make money on an advisor that has only a couple million dollars under management,” says Wangsness.

Being headquartered in Omaha, Nebraska, is one way Ameritrade keeps its costs down. Hiring a customer services representative for a call center in Omaha costs a lot less than in Boston, San Francisco, or Jersey City, he says. Plus, Ameritrade is leveraging its Web site for retail clients to service advisors and their clients. “We’ve automated a lot of services for the advisor and end client,” he says.

Averaging 137,000 trades a day in October 2002, Ameritrade processes more stock transactions than any other online brokerage. While Ameritrade is dwarfed by Schwab when compared in terms of the amount of assets it holds and its total revenues, it has built up a huge trading business and is seeking to generate bigger bottom-line profits by scaling up to utilize its existing Web trading and services infrastructure.

Unlike rival e*trade, which has been seeking growth by branching into mortgages, banking, and other related financial services, Ameritrade has used the bear market to become a massive online brokerage via acquisition. Ameritrade earlier in 2002 acquired National Discount Brokerage, and late last year completed a merger with Datek, a big online broker that was popular with day traders. Ameritrade charges $10.99 per trade for retail and advisor clients. Based on its current cost structure, a spokeswoman says that for every 16,000 trades above what Ameritrade currently executes, seven cents per share goes to its bottom line.

“If we can make money on retail clients, we can certainly do it on the advisor side of the business,” says Wangsness, explaining the business plan. “We’ve educated our advisors and worked to make our sites more intuitive and automated and efficient.”

Relying more heavily on the Web to keep service calls from advisors and their clients to a minimum is part of the plan for keeping costs down. “If a retail client calls in, for instance, and asks for a balance, we give them the answer, but also show them how they can find the answer themselves online,” says Wangsness.

Ameritrade’s Web site for retail clients is ranked No. 6 by, a research firm that specializes in Internet quality measurement. Gomez ranks user experiences at 20 online brokerages for ease of use, customer confidence, on-site resources, relationship services, and overall cost. Schwab is ranked No. 1, followed by Fidelity, e*Trade, Harrisdirect, and TD Waterhouse. Gomez ranks Ameritrade second, behind e*Trade, for hyperactive traders, which would seem to support Wangsness’ contention that advisors would benefit from the Ameritrade Web platform. “Low-cost trading, a simple interface, and outstanding site performance are crucial,” Gomez says in describing hyperactive traders.

In addition to leveraging its Web site and technology, Ameritrade is seeking to leverage its correspondent clearing operations by attracting reps with commission business who want to migrate to fees. Wangsness says Ameritrade “loves fee-only planners,” but he says he knows there is a much bigger market for Ameritrade in breakaway brokers who leave wirehouses and those affiliated with an independent broker/dealer. Ameritrade clears for 25 B/Ds with, on average, about 25 reps apiece. But it also clears for Princor, the B/D owned by Principal Financial Group.

Wangsness, who heads sales of the correspondent clearing business as well as to RIAs, says that Ameritrade wants to focus on reps that want to stay at B/Ds because they can continue to collect trail fees on 12b-1 funds while also running their own RIA, as well as reps who want to start an RIA but who don’t have the knowledge or business acumen to run their own business without the help of a B/D.

Ameritrade has attracted about 300 advisors in the two years since it started marketing to RIAs. It has a staff of 25 serving those RIAs and the less demanding needs of its 25 B/D clients. On average, the RIAs it is working with have assets of $1.3 million, Wangsness says. They often trade stocks and that is the strongest side of Ameritrade’s advisor platform. But the company also offers a supermarket with 11,000 mutual funds including 1,000 with no transaction fees, and recently inked a deal with ADVISORport, a separate account research and technology platform.

The online advisor platform, called Ameritrade Connection, offer advisors a Web-based view of all their client accounts and Ameritrade data can be downloaded into into Schwab PortfolioCenter, dbCAMS, or Advent Axys, using Advent’s Custodial Data Service. Ameritrade is considering developing its own portfolio accounting and performance reporting application.

“We’re not trying to serve billion-dollar asset managers who need a Rolls Royce,” says Wangsness. “We’re serving Ford buyers.” Maybe that is a better idea.