Financial advisors have nothing to fear from TD Ameritrade’s recently announced Personalized Portfolios service for retail clients, says Chief Executive Officer Tim Hockey.
In an interview with Wealthmanagement.com at the firm’s recent Elite Linc conference in Colorado Springs, a gathering of 275 of the custodian’s top financial advisors, Hockey said the introduction of the managed account service, which pairs a retail client with a TD Ameritrade financial consultant to construct goals-based investment portfolios, is meant more to fill an “advice gap” for the company’s traditional do-it-yourself investor who doesn’t want the full engagement with an independent advisor.
“There are so many clients we refer to the RIAs,” he said, mostly via the AdvisorDirect program, but only 30 percent of the retail clients actually take the referral and sign up with the independent advisor. “So we know there is an advice gap.”
Hockey said the new service, just announced earlier this month, is not meant to compete with the over 6,000 independent advisors that custody on the TD Ameritrade Institutional platform, largely because those advisors provide a lot more value for clients than bespoke investment management.
“There is still disproportionate room, particularly as our advisors are going more and more upstream,” he said, and engaging with clients whose needs go far beyond portfolios. The real value of human advisors is not scalable, he said. “Technology is taking up more of the low-end clients. The robo is part of that, Personalized Portfolios is another segment.”
The service is for retail clients with at least $250,000 in investable assets and includes a meeting with a financial consultant who helps create a personalized goals-based financial plan and tailors an investment portfolio around it. A digital dashboard lets the client view all the financial accounts they own, monitors progress toward the goals and tracks the investments. Fees are up to 90 basis points.
Advisors gathered for the annual conference agreed with Hockey—few said they saw the more personalized investment service as a threat to the independent advisor.
“It’s a continuum, it doesn’t bother me. I think practices that might be threatened by that aren’t the ones set up to provide a full range of valued services,” said Mark Shone, principal of Shone Asset Management in Walnut Creek, Calif.
Speaking more broadly of the financial markets, Hockey said advisors should be preparing to have the kinds of conversations with their clients that they’ve not had to have in over a decade as client portfolios become a lot more volatile. “Not just structurally, but emotionally. And it’s way more difficult to have that conversation.”
“We’re at the tail end of a long, long bull run,” he said. In bonds, a 35-year bull market is coming to an end as interest rates go back up. “That’s going to have a very different effect on the marketplace,” he said, referring to the early February rout in equity markets and spike in bond yields. “That is so rare,” he said, but the current market is susceptible to those kinds of shocks. “We’ll get a few more. Something will eventually shake the market. My sense is it’s coming soon.”
He said the frothy markets might result in a resurgence of active investing. “Passive investing has been on an incredible road, and rightly so,” he said. “But when markets get shaky, there will be a resurgence in active especially as some investors look for that edge.”
While the Personalized Portfolios service is new, it’s an indication of the emphasis he’s placed on technology innovation inside the firm since becoming CEO in 2016. Consider, he said, that in 2016, of the $3 billion expense base for his firm, less than $1 million was spent on future technology, as opposed to current initiatives. Now, he says, that investment has greatly increased, and it’s “the most hotly contested dollar” among the various teams inside the firm.
That may not extend to creating a platform for trading in cryptocurrencies like Bitcoin or Ethereum any time soon, however. Hockey said he personally owns no cryptocurrencies, though he is bullish on the underlying blockchain technology. The recent valuations of the coins, peaking in December, is clearly more of an asset bubble, reminiscent of tulip bulbs in 17th century Holland. Asset prices might have been extreme, but it didn’t eliminate the tulip bulb itself. "You’ve seen this movie before. Crypto itself I would expect to shake out.”
A narrow slice of retail clients can currently trade Bitcoin future contracts on TD Ameritrade’s platform, but the firm would take a cautious approach to bring direct trading in crypto itself. “It doesn’t mean we’re not experimenting,” he said, “But we would tread very carefully.”
Hockey said he foresees a continued and mutually profitable relationship with independent advisors, particularly as the cost of delivering investment advice drops.
“The dynamic of the custodial relationship is that advisors largely get it for free,” he said. Paying for all the ancillary services is largely on the basis of client cash, which in a higher rate environment is an increasing revenue source for custodians. Custodians use that revenue and heft and scale to deliver more value for the advisors in ways individual practices could not do on their own, whether that’s in the form of better analytics, artificial intelligence or machine learning, all initiatives that TDAI is thinking about for advisors. “The advisors say that is fantastic,” he said. “Whether or not they will pay for it, that’s different.”