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.
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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.