The growth of ETFs in recent years has been nothing short of extraordinary, with more than $3 trillion of ETF assets in the US, and ETF adoption amongst advisors rising rapidly from just 40% a decade ago, to 88% of advisors today. Yet, unfortunately, one of the main appeals of ETFs – that they trade “like stocks” – has also inhibited their growth, as the ticket charges of trading commissions can add up quickly for younger investors that are still in the accumulation phase and making modest ongoing contributions to a diversified multi-ETF portfolio. Fortunately, in recent years, RIA custodians have helped to fill this void by offering so-called “no-commission” or “no-transaction-fee” (NTF) platforms, where a set list of ETFs can be traded without incurring transaction costs… which has been especially helpful for advisors creating ETF portfolios for young savers. Yet this week, TD Ameritrade upended its no-commission ETF Market Center for financial advisors by announcing the removal of 84% of their current NTF exchange-traded funds, including several iShares Core ETFs and the entire lineup of popular Vanguard ETFs!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the TD Ameritrade’s big announcement, the good news of their newly expanded ETF Market Center lineup, and the bad news of how TD Ameritrade’s decision to remove 84% of the existing no-commission ETFs upends financial advisors on the platform – and has been particularly damaging to those advisors who were most loyal to ETF Market Center while serving next generation clients!
In recent years, TD Ameritrade’s ETF Market Center platform was used primarily by financial advisors who wanted to construct simple low-cost passive portfolios for their younger clientele, whose more moderate account balances and ongoing contributions were especially well suited to the no-commission ETF lineup… especially given the availability of low-cost iShares Core and Vanguard ETFs. Yet some financial advisors prefer to express a wider range of investment views, from more targeted allocations (which can be tax loss harvested), to applying factor tilts… and accordingly, TD Ameritrade has expended the selection of Market Center ETFs up to 296 (including the new ultra-low-cost State Street “SPDR Portfolio” series).
Yet unfortunately, the removal of all Vanguard ETFs and the most popular iShares Core ETFs has put advisors in the lurch, leaving them barely 30 days to make changes for their clients before ticket charges will apply. Which means, what was a convenient solution for financial advisors has just become a big headache, as they must now scramble to investigate and map out replacement funds, contact clients, and update portfolios over the next 30 days.
Fortunately, the reality is that all those Vanguard and iShares Core ETFs are still going to be available through TD Ameritrade. They’re not being removed from the custodial platform; they’re simply being removed from the commission-free ETF Market Center platform, and as a result advisors can continue to hold onto those ETFs for existing clients. But after November 20th, any subsequent purchases for new contributions (or sales of existing ETFs) will cost $6.95 per trade. Which for small ongoing contributions, is still cost-prohibitive, and will likely force advisors to at least switch to the new ETF lineup for new contributions, and potentially make switches for the existing ETFs as well.
Except making such a transition introduces a lot of operational complexity for advisors. Because now advisors will be forced to decide whether to switch all existing funds from the old lineup to the new lineup. Which is challenging because, even without ticket charges, there are still bid/ask spread concerns to consider… especially given that some of the new ETFs still have very low volume. In addition, long-term accumulator clients now have substantial capital gains issues, after 7 years of a raging bull market! And keeping existing funds in current ETFs and allocating new funds to new ETFs is logistically very difficult to manage without rebalancing software – and at best requires programming “proxies” into current rebalancing tools just to ensure accidentally-taxable sales aren’t triggered in the future.
And if these investment decisions weren’t enough to cover in 30 short days, the real challenge for virtually every advisor will be the client communication burden imposed by the TD Ameritrade changes. By adopting completely different ETFs, advisors are going to need to have a lot of conversations over the next 30 days… not to mention needing to review (and potentially get signed and updated) Investment Policy Statements, update Fact Sheets and address hypothetical performance comparison issues going forward due to the fact that the new ETFs are largely built around different indices than the prior line-up, and review tax considerations on a client-by-client and account-by-account basis!
Perhaps most frustrating, though, is that there’s no reasonable explanation for why TD Ameritrade is forcing these changes on its RIAs and next generation clients… except that apparently State Street and other ETF companies were willing to pay more to be in TD Ameritrade’s ETF Market Center than the existing players (as Vanguard is notoriously not willing to share revenue with custodians). Which means, basically, that TD Ameritrade sold out financial advisors and their next generation clients on the ETF Market Center lineup! And it’s perhaps no coincidence that this change happened just a month after RIA champion Tom Bradley left TD Ameritrade… raising the question of whether there is a cultural shift away from Institutional business at TD Ameritrade, and grossly undermining TDA’s position as a “champion of RIA fiduciaries” and next generation clients.
Ultimately, though, TD Ameritrade does still have some options to right their wrongs and restore trust with advisors and their next generation clients. First, TD Ameritrade could simply bring back the old funds and add them to the lineup of new funds (as the fundamental problem with the announced changes is not the additions, but the subtractions that were made). If TD won’t make such concessions for everyone, at least they can consider doing so as an “Institutional-only” option, or otherwise grandfather advisors who were already on the ETF Market Center platform. Or perhaps it’s simply time to stop all of the faux “free ETFs” arrangements (which are only “free” on the front-end because RIA custodians make money on the back end from revenue-sharing shareholder servicing fees and sub-TA fees) and instead simply offer a low-cost fee-based wrap account for a few basis points that advisors can use for any ETF as a true open architecture platform. In other words, instead of selling out advisors to get 1-2 basis points on a SPDR Portfolio core fund, why doesn’t TD Ameritrade just charge advisors 3 basis points and make all ETFs available with no trading costs?
The bottom line: Will TD Ameritrade Institutional do what it takes to make it right with its RIAs and next generation clients who were blind-sided by being sold out to the highest asset management bidder?