TD Ameritrade Mulls RIA Succession Financing

TD Ameritrade Institutional President Tom Bradley tells Registered Rep. the custodian is considering whether to offer succession financing for its RIA clients. In an interview with editors, Bradley said TD is evaluating three ways to do it: using its own capital, partnering with TD Bank (which owns 45 percent of the company), or staying out of the financing and, instead, referring interested RIAs to outside parties such as aggregators who are willing to put up the money. None of these options is final, Bradley says.

TD Ameritrade is the latest custodian to explore succession financing as a possible service for RIAs. Charles Schwab spokeswoman Anita Fox said the custodian also is working on a program that would provide financing for mergers and acquisitions and for succession planning for advisors, with a launch goal of later this year. She declined to provide further details or confirm details that have been reported elsewhere in the media.

It’s an issue that draws attention in the RIA industry as financial advisors approach retirement in growing numbers; a little over a year ago Pershing Advisor Solutions and FA Insight reported that the share of advisors aged 56 and up had reached 36 percent of the market in 2009, up from 32 percent just two years earlier. Business owners and partners will be looking for ways to cash out the equity in their practices, often by selling them to other firms or perhaps to junior advisors on their own staff.

As Bradley put it, “If my competition is doing it and there’s a demand from advisors, we’ll have to look at it.” He said that TD Ameritrade is in a good position financially to help make such deals happen; the company had $918 million in cash at the end of 2011, compared to $1.3 billion in long-term debt—and it likes to stay flush for acquisitions and other business opportunities. TD wouldn’t need lots of money to do financing, Bradley added, since the RIAs are small businesses. But there is one issue that’s a potential roadblock—the conflict of interest posed to an advisor who moves assets to a custodian that’s lending him money.

“It’s probably a conflict of interest that can be disclosed away,” Bradley said. “Lawyers are looking at that now. If it can’t be disclosed away, well, then you can’t do it.” He added that for assets under the purview of ERISA rules, such as IRAs, “you absolutely can’t do it.” Bradley said TD has been reviewing the possibilities for about a month; he expects to talk more about it at the custodian’s annual conference starting Feb. 1 in Orlando, Fla.

There would be no conflict if TD Bank offered such financing, Bradley observed, although it’s outside of their typical business lending purview. Bradley added that he doesn’t worry about the growth of rollup RIAs that are often interested in helping work out succession issues. “We view the rollups as neutral to positive,” he said; he has amiable discussions with Rudy Adolf, the head of Focus Financial Partners, an aggregator of RIAs.

Working with aggregators on succession financing makes sense for custodians, said Alois Pirker, an analyst with Aite Group in Boston. “What do you need to retain assets on the custodian’s platform? If you’re the matchmaker on succession planning, chances are you will retain the assets as well. If you’re not involved in the process, you risk losing the assets,” he said. “It’s a horse race between the custodians right now, on the technology side, on the service side.”

TD Ameritrade saw a sharp increase in its RIA ranks in fiscal 2011. The custodian drew 341 breakaway brokers to its ranks, Bradley said; that number is up from the 284 brokers the company reported in fiscal 2010. The total number of advisors on its platform is 4,000 to 5,000, and “closer to 5,000,” Bradley said. TD Ameritrade doesn’t disclose how much in assets its advisors hold on its platform, although the figure is about a third of TD Ameritrade’s total client assets, including those of retail customers. (Total client assets were $404.2 billion on Nov. 30; Bradley estimates the average RIA client with TD manages $300 million, a figure that includes assets both held at TD and held at other locations.) The company had a record $41 billion in net new assets in fiscal 2011, more than half of which came from advisors, he said.

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