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?
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces.
So for this week's Office Hours, I want to talk about the big bombshell announcement that TD Ameritrade dropped on financial advisors on Monday, a total revamp of their ETF Market Center or what most advisors know as their commission-free or no-transaction-fee NTF platform for buying and selling exchange-traded funds. So the commission-free ETF platform used primarily by those of us working with next-generation clients, who tend to be younger with small account balances, make small ongoing contributions, where even just $6.95 a trade can be a very cumbersome transaction and trading cost.
You know, if you have a client who's trying to save a $1,000 bonus and wants to add it to an existing diversified portfolio across half a dozen ETFs, that's 6 purchases, $6.95 each, almost $42 in trading cost. On $1,000 contribution that's a 4.2% up front transaction fee, which just doesn't work. Until you have a solution with a bunch of ETFs that are all NTF, no-transaction-fee, and you can allocate the client's assets directly into the ETFs without trading costs. That's the deal of an NTF platform.
Now, if you're doing a $1 million rollover, it's not such a big deal, you can just pay $6.95 a trade, it's a 0.004% trading fee. Even with a $100,000 rollover, allocating a half a dozen ETFs is just a cost of barely 4 basis points. It's not such a big deal. But when you're working with younger Gen X and Gen Y clients who are still accumulating and each individual contribution can be a very modest dollar amount, having ETFs that trade commission-free is a really big deal and a really client-friendly solution, at least as long as you've got a reasonable list of ETFs on the platform in the first place, which TD Ameritrade did. Their ETF Market Center had a good list of 100 ETFs, including Vanguard ETFs, iShares Core funds, along with a handful of one-off solutions in particular asset class areas, from PowerShares, WisdomTree, VanEck, some State Tree SPDRs.
And so it was in this context that TD Ameritrade announced on Monday a big expansion rolling out to the ETF Market Center. We're going from 100 ETFs to 296 ETFs, expanding the line-up with more PowerShares and WisdonTree funds, huge new list of First Trust ETFs, some ETFs from J.P. Morgan, ProShares, even some new QuantShares ETFs, where you can buy Market Neutral exposure to Beta and Momentum.
In addition, TD Ameritrade revealed that it was effectively wanting to launch partners of a new State Street SPDR Portfolio series. So the new SPDR Portfolio ETFs are meant to be ultra-low-cost ETFs for core market asset classes, basically akin to Vanguard's ETFs or iShares Core ETFs. The SPDR Portfolio ETFs include a Total Market Fund with a three basis point expense ratio. That's right, like 0.03% for diversified/the whole stock market, along with a Large Cap ETF for three basis points, a Small Cap Fund for five basis points, an Aggregate Bond ETF for four basis points, etc., etc.
So all this sounds like great news. We've got an ETF market spender where you can buy a great range of 100 ETFs for no-transaction-fees that get expanded to almost 300 commission-free ETFs, big expansion of asset classes, more ETF providers, new ultra-low-cost ETF competitor into the mix. So what's the problem? Why has there been so much of an advisor backlash against this? Because the part that TD Ameritrade neglected to mention in its announcement is that in the process of rolling out the new funds, it eliminated 84% of the existing funds.
New TD Ameritrade Market Center Eliminates Vanguard And Most iShares Core Funds [Time - 3:44]
And the eliminated ETFs from TD Ameritrade Market Center wasn't just any ETFs. As the Wall Street Journal noted, I think they got the lead right on the coverage Monday morning, TD Ameritrade eliminated all of the Vanguard ETFs. All of them. And it also eliminated many of the iShares Core ETFs. You know, the ultra-low-cost ones in core asset classes like small cap, mid cap and the S&P 500.
So when TD Ameritrade announced, "We've revamped the ETF Market Center with a new expanded lineup," they kind of conveniently excluded the part, "Oh, and the average cost of all these new ETFs is substantially higher than the ultra-low-cost Vanguard and iShares Core funds that we're completely eliminating from the lineup." Now, to be fair, TD Ameritrade did introduce the new SPDR Portfolio ETFs, which was clearly intended as a substantive replacement for the Vanguard and iShares Core funds being removed.
And they are pretty similar. Old iShares Core Small Cap ETF, expense ratio of seven basis points, new SPDR Portfolio Small Cap ETF is five basis points. Vanguard Total Market is four basis points of expense, new SPDR Portfolio Total Market is three basis points of expense. So, ultimately, for advisors who just want to buy those low-cost core asset class ETFs for clients, you can actually do it slightly cheaper than the old lineup. State Street is clearly making a big push to compete against Vanguard and iShares in this space and seems to be using TD Ameritrade's Market Center, ETF Market Center as the platform to do it.
But here is the problem with how TD Ameritrade made the change, and it's a big one. If you were an existing loyal TD Ameritrade advisor already using the ETF Market Center with your next-generation clients, you basically just got screwed. And you only have a month to figure it out because all the old ETFs are being removed from the commission-free lineup in a month, on November 20th.
TDA Changing Commission-Free ETF Line-Ups Disrupts Existing Advisors Serving Next Generation Clients [Time - 5:32]
The problem, here again, is it's great to say, "Hey, TD Ameritrade just tripled the breadth of its ETF Market Center lineup," but the real-world impact for us advisors is hey, TD Ameritrade just eliminated 84% of the existing commission-free ETFs, including all the Vanguard ETFs and the most popular iShares Core funds that advisors were using with small clients who just needed a low-cost simple asset allocated portfolio, which means now we as advisors have to figure out what the heck to do going forward.
And we experienced this personally for ourselves. As many of you know XY Planning Network announced just six weeks ago we are rolling out XY Investment Solutions, a turnkey asset management platform with portfolios built for Gen X and Gen Y next-generation clients that we serve in XYPN. And we created it using TD Ameritrade's ETF Market Center because our advisors serve young clients who make ongoing contributions with $6.95 ticket charges to up savings. And now 6 weeks into the launch, as advisors are in the midst of actually transferring clients to the new models, TD Ameritrade blindsides us by eliminating 84% of the ETF lineup we built our platform on, which is pretty much how it played out for us. Our Core ETF model actually lost 85% of its lineup 6 weeks after launch.
So our chief investment officer had to spend the last 48 hours scrambling, as I know many other advisors have as well, trying to analyze all 296 new ETFs and figuring out how to map the old ETFs to the new ETFs in the lineup and pair them all together. Because, of course, as soon as TD Ameritrade announced this to the public and the media, advisors start calling and asking how this impacts them, which is reasonable, and to which we have to respond, "I don't know because TD Ameritrade gave us 0 warning that they were about to eliminate 84% of the ETF lineup after 7 years. We're still figuring out."
Now, again, the good news is that this is actually a pretty reasonable lineup of options in the new ETF Market Center. Most of the State Street Portfolio ETFs are at least comparable costs and were actually a little cheaper. And, again, I think it's clear State Street was trying to undercut competitors where they could, even just by a basis point or two, to say they're the cheapest, which means ultimately, even for us at XY Investment Solutions, we've been able to find and map out at least a reasonable alternative lineup of Core ETF models, but the new options don't map perfectly but they're close. Ironically, I think actually we got lucky because we had just launched and most advisors were still in the process of moving clients. They weren't fully invested.
But it's still an unpleasant fire drill of analyzing ETFs that TD Ameritrade blindsided us with. And while we've been able to map out solutions because we have a dedicated chief investment officer whose job is to roll up his sleeves and dig into these issues when they arise, if you were a solo advisor who had existing clients in ETF Market Center running your own models, you really just got screwed.
Adapting To TD Institutional’s New ETF Market Center Line-Up For Existing Advisors [Time - 8:15]
Because if you're an existing advisor using the commission-free ETFs in Market Center, now you have to figure out what to do with all those existing clients already in all the ETFs being eliminated, even as those clients keep making new contributions to the account.
The reality, fortunately, is that Vanguard and iShares Core ETFs do still stay available on TD Ameritrade. It's not like they're being removed from the custodial platform, they're being removed from the commission-free ETF Market Center platform, which means you can keep holding them for existing clients. It just means that after November 20th, you'll have to pay $6.95 a trade, whether that's selling any existing ETF positions, buying them, or any new contributions. But in practice, that produces a lot of operational complexity for us advisors because now we have to make a whole bunch of choices about how to handle this, right?
Number one is are you actually going to switch all your clients' existing funds from the old ETF lineup to the new ETF lineup? Now, as long as you do it by November 20th, you can make the switch without any ticket charges. But even without ticket charges, you still have to bear the trading impact of the bid-ask spread. And even if the bid-ask is a penny, on an ETF that's trading nominally at a price of 30 bucks a share, that's a trading cost of 3 basis points to swap an ETF that might only be 1 basis point cheaper, which means it's not an automatic win to make a switch, at least not for several years. And if you're trading in new ETFs like the SPDR Portfolio ETFs, you have to worry about whether the new ETFs have the volume to hold a one penny bid-ask spread. Because if it's two pennies, that's a six basis point cost to save a basis point a year, which means you've got to hold them until the 2020's just to benefit your client for this shift that TD Ameritrade has imposed on us.
And the worst news is that the ETF Market Center launched seven years ago, which means if you've actually been a loyal advisor, using this for seven years with your clients, you have seven years of gains in a raging bull market, which means all your clients with taxable accounts have massive capital gains hits if they make a switch, which for most of them is untenable. If the ETFs were in an IRA, no tax consequences, it's just the bid-ask spread, but if the ETFs were in a taxable account, you now have a tax problem that prevents you from making a wholesale shift to the new ETFs with your client. Which means TD Ameritrade just blew up our operational efficiency of all the advisors using the platform because now you have to go account by account, client by client just to figure out who can switch to the new ETFs and who has to keep the old ones due to tax purposes or the trading cost.
The second choice is that that's just what you do with the existing clients with the dollars, then you have to figure out if you're going to switch all your new contributions from the old ETF lineup to the new ETF lineup. Now, this is more straightforward, frankly. That even with TD Ameritrade cutting its trading fees earlier this year from $9.95 to $6.95 a trade, for someone who saves $10,000 at a time, allocating $10,000 at $6.95 a trade in a half a dozen ETFs of a diversified portfolio is a trading cost of over 40 basis points. And, you know, if they're saving 1,000 bucks, it's 4% of their account balance in trading fee. So it's going to be pretty hard to stick with the existing ETFs that were in the Market Center for new contributions going forward even if you decide to keep the existing funds in the old ETFs because you don't want to trigger capital gains.
But then you have to figure how to massage all this together. You know, I know some advisors who are considering whether to just absorb the ticket charges themselves, keep the old ETFs, keep adding to them just to protect their clients from what TD Ameritrade is inflicting on them. Except small clients making small trades, this blows up the economics of serving small clients for us as advisors, especially since these are already the clients who pay us the least if we're charging AUM fees because the accounts are smaller, and that's before we try to pay their ticket charges with taking up the bulk of our fee.
We have to pass through the cost when realistic that means we're going to have to switch to the new ETF lineup for new contributions. But now that means TD Ameritrade really blows up our operational efficiency because now you're going to have to split portfolios for clients where prior contributions are in 1 set of ETFs, which you can't solve because of capital gains, and new contributions are in a different set of ETFs because TD Ameritrade eliminated 84% of the old lineup, including all the most popular options for advisors.
How you handle this depends on your own technology stack. The good news, if you're using TD Ameritrade's iRebal, you can actually set up what's called a proxy holding, where you tell the software, "When rebalancing, use the old iShares LQD Corporate Bond fund as a proxy for the new SPDR Portfolio Intermediate Corporate Bond ETF so the client doesn't need to be rebalanced as long as they have an appropriate allocation to either, but hold the new SPIB as the main ETF going forward for new purchases." Now, if you don't use that feature in iRebal already, you now have to map all your old ETFs to the new ones and then reconfigure all your models to show the proxy positions and then double-check it's not triggering new problems for clients.
If you don't use TD Ameritrade's iRebal or any rebalancing software at all, it's even worse. You have to split between what you used to buy and what you buy going forward. So I'm hearing some advisors that are just building spreadsheets to try to keep track of this, I'm hearing others that are just saying, "We're going to make new accounts for clients, new contributions going to a new account, which gets rebalanced with those funds. Old contributions stay in the old account, which we won't rebalance because we don't want to trigger the trading cost, so at least we'll rebalance less frequently." But now that means you have to open new accounts for every client that's making ongoing contributions by November 20th.
And for a lot of us as advisors, the real challenge to all of this is actually the client communication burden. Because I suspect for virtually every advisor, you are going to go with the lineup in the Market Center, at least for new contributions because the smaller next-generation clients where this platform most commonly gets used, even $6.95 a trade is just too burdensome as a trading cost. I mean, that's what made no-commission ETF platform so appealing. Except now you're going to be complying completely different ETFs, which means you kind of have to tell your clients about it. Or at least you should. Technically, if you have discretion, you don't have to tell them in advance, but you should. And if you don't have discretion you absolutely have to communicate to just every client and get their sign-off in advance.
In addition, you have to review your own investment policy statement because some advisors I know actually include in their IPS, not just their target allocations, but the exact funds they typically use. I actually don't recommend advisors put specific ETFs into their IPS precisely because it creates challenges if you need to switch what you're using, but now that means you actually have to review all the IPSs for all of your clients to make sure that you're not locked into old ETFs in the IPSs, because that means before you make any switches, you have until November 20th to update your IPS, send it to clients, get it signed and get it returned, then start queuing up the trades because otherwise you'd be violating your IPS after November 20th if you start trading in the new ETFs and your investment policy statement didn't stipulate that you were going to do it.
And on top of that, you're going to have to update all of your proposal tools. Any fact sheets you made about your models to properly reflect all the new funds. And for a few of you, you'll find this is actually the most painful because for those of us who like to show hypothetical historical performance of ETFs in a proposal tool, the new ETFs don't match the old ones, not exactly because they're built on different indices. Vanguard tended to build indices using CRSP data, iShares Core ETFs were mostly built using S&P indices, but the SPDR Portfolio ETFs are mostly built using Russell indices instead.
Now, usually, these are pretty similar. Vanguard Total Market using CRSP data is virtually identical performance within literally like a few basis points as the Russell 3000 Total Return index, which the SPDR Total Market uses, minus just 3 basis points it costs a year. So they're virtually in parallel. But they're not all the same. So the old iShares Small Cap ETF had a 7 basis point expense ratio and used the S&P SmallCap 600, the new SPDR Portfolio Small Cap costs 5 basis points instead 7, but it uses the Russell 2000 instead of the S&P SmallCap 600.
And that matters because if you look over the past 3 years, the Russell 2000 underperformed the S&P SmallCap index by 600 basis points because of how different it's constructed. So thanks to TD Ameritrade, we now have a new investment option that saves clients 2 basis points a year on expense ratio and only costs them 600 basis points of underperformance in the past 3 years. Owe.
The point here is not really about S&P indices versus Russell indices, but the fact that you can't perfectly map the old ETF lineups to the new ETF lineup because they change most of the indices, and those have difference performance, changes the projections of proposal tools, changes fact sheets, forces firms to redo all of it, and is yet another burden that TD Ameritrade has imposed on us. In fact, if you actually look, you'll see the new ETF lineup literally doesn't even have an S&P 500 index fund. There's no S&P 500 index fund in the ETF Market Center anymore. There's just SPDR Portfolio Large Cap, but it's the Russell 1000, not the S&P 500.
Why Did TD Ameritrade Blind-Side And Sell Out Its RIAs Serving Next Generation Clients? [Time - 17:00]
In the end, I think the biggest frustration of all the ETF lineup changes in the Market Center, though, is the way that it blindsided us as advisors and inflicts all these real-world operational challenges and business costs on us. If you weren't using iRebal before as an advisor on TD Ameritrade, you pretty much have to now. Or lose hours and hours in additional complexity managing small clients with multiple models through spreadsheets where old ETFs for the existing funds and new ETFs for the new contributions, even if you were using iRebal, it's still not quite the same because you've got to add the proxy holdings if you weren't before and you've got to map them all out.
And in addition, we have to completely remap all the portfolios themselves, update fact sheets of proposals tools, update investment policy statements, get them resigned if applicable as a matter of best practices, contact and communicate this with every client. And TD Ameritrade gave us a month until November 20th to do all this with no warning. And they imposed all these operational costs and burdens on our smallest clients, typically our next-generation clients for which as our advisors we rely on keeping it simple and operational efficiencies to serve those clients profitably, which TD Ameritrade blew up with no warning.
And the even worse part is there's no reasonable explanation as to why TD Ameritrade would force all these changes on RIA's next-generation clients. There's no reason. Well, all right, that's actually not true. There is one pretty good reason, and the reason is that they made more money. State Street and the other ETF companies were willing to pay more to TD Ameritrade to be their ETF Market Center. Vanguard is notorious for not being willing to pay much of anything in servicing fees, sub-TA fees, and all the other ways that custodians try to make money on the back-end. I can only presume that BlackRock wasn't willing to match State Street's payments to TD Ameritrade either on its lowest cost core funds because they're so low cost. There's just no money left to pay much of anything.
State Street was probably willing to do it because they view the TD Ameritrade deal as a loss leader to gain market share and visibility so they can gain adoption with other advisors and platforms in the future. Which means basically TD Ameritrade sold us out on the ETF Market Center. I mean, kind of literally sold us out. Took away the ETFs we were using on our clients, inflicted all these operational complexity and business cost on us so they can get a couple of more basis points from State Street that they couldn't get from Vanguard or BlackRock.
And the saddest part is that the advisors who got sold out are the longest-standing advisors, because the longer you've been using the ETF Market Center with the clients, the more dollars and accounts and models you have with the existing funds, and the more disruptive this is to change to all the new ones. And they primarily sold out their next-generation clients because those are the clients who make the small periodic ongoing contributions where commission-free ETF platform matters the most. And it's painfully ironic because earlier this year TD Ameritrade Institutional promoted Kate Healy to be their managing director of Generation Next, specifically to grow their reach with next-generation advisors clients and then made a change that sold them out.
Now, to be fair, I suspect that this change actually wasn't really driven by the Institutional side of TD Ameritrade at all because the ETF Market Center is used by both sides of the platform. RIA is on TD Ameritrade Institutional and retail investors. And it was under a month ago that TD Ameritrade closed the acquisition deal with Scottrade, which brings hundreds of new retail branches and millions of new retail customers to TD Ameritrade to whom it can sell a revamped and expanded and now more profitable ETF Market Center.
And I think that's actually the real reason for the ETF Market Center shifts. As advisors, we were not the target. We were the collateral damage to TD Ameritrade's retail push. And I think that's why there was no warning for advisors. That's why the press release went to the media on Monday morning. But from what I'm hearing, TD Ameritrade didn't even start communicating with RIAs until Tuesday when the backlash began. I actually wouldn't be surprised if the TD Ameritrade Institutional team actually got blindsided internally as well in that this might have been an internal decision for retail for which the whole Institutional division was collateral damage. And I have to admit, I think it's no coincidence that this happened just a month after Tom Bradley left.
So for those of you who aren't familiar, Tom Bradley was the leader who built most of the infrastructure and team that we now know and love as TD Ameritrade Institutional. He was incredibly well-respected in the RIA community, did a fantastic job of watching out for RIAs. A few years ago he switched to the retail division. Ostensibly broaden his resume because he was likely hoping to have a shot at the CEO job when Fred Tomczyk retired. Except Tom Bradley got eliminated from TD Ameritrade a month ago. The new TD Ameritrade CEO Tim Hockey chose Scottrade retail chief Peter deSilva to lead the retail division instead of Bradley.
Because I can't imagine this kind of event happening to TD Ameritrade Institutional under Tom Bradley's leadership. He knows the RIA space, he would not have let retail put through a change like this without at least giving a warning to the Institutional division and figuring out a transition plan. I just can't believe that retail would have driven this through with such adverse effects for advisors under Bradley's leadership. This feels like an entire cultural shift to TD Ameritrade, and that the whole organization is swinging more retail-centric as it eliminates leaders from its RIA division and then sticks it to advisors who have to deal with changes that are driven by the retail side of the business.
And it really stings on the advisor's side because TD Ameritrade has the reputation as one of the most open architecture platforms. And there's nothing more closed about architecture than limiting choices for advisors. Well, there's nothing more closed than removing existing choices for advisors, which is worse. And that's what TD Ameritrade did.
And, in fact, one of the biggest questions I've been fielding from advisors over the past 48 hours is, "Do I now have to leave TD Ameritrade and move my clients direct to Vanguard to maintain my fiduciary obligation to my clients as an RIA that was already investing them in Vanguard funds?" Now, just to be clear, no, you really don't have to leave. You're not obligated to restructure your entire business just to have access to Vanguard funds. The SPDR Portfolio funds are a reasonable option, reasonable access to indices, very comparable cost. And if the platform you were on creates trading costs for one fund and waives trading cost for another so that the all ins transaction cost for the new SPDR Portfolio funds really are cheaper than the Vanguard funds, then yes, making a change to the new even cheaper SPDR Portfolio, because the old Vanguard fund got an effective cost increase is actually a reasonable fiduciary thing to do, to make that switch.
But the fact that advisors even have to ask the question of TD Ameritrade, what a horrific way to undermine the credibility after years of TD Ameritrade's fiduciary advocacy and leadership. And it's embarrassing to go from a leading advocate of the fiduciary standard for RIAs to making RIAs in their platform legitimately ask the question, "Can I even fulfill my fiduciary duty by staying with TD Ameritrade?" Wow. And it hurts because essentially, this amounts to material fee increase on Vanguard and iShares Core funds, except the funds didn't put through the increase, TD Ameritrade did as the intermediary, put through the increase so that they can make more money off of us and our clients and stick it to us to deal with the consequences.
And all for SPDR Portfolios that are what? Three to seven basis points in cost. I mean, I can't imagine how low the payment was anyways. I mean, TD Ameritrade, did you really sell us out as advisors and our next-generation clients for, like, one basis point on a five basis point ETF? I mean, this is what we expect from profit-centric retail platforms. As advisors, we often sell against this kind of behavior from competing brokerage platforms to win client business. We don't expect it to happen to us from our fiduciary-advocating RIA custodian. And it raises concerns about the EFT Market Center going forward, right? If the platform is willing to stick it to us once and swap in ETFs that pay your more, even if it disrupts our clients, what are the odds it'll happen again? Is TD Ameritrade even the right partner anymore for advisors serving next-generation clients I they can't be trusted to bring stability into their platform?
Will TD Ameritrade Institutional Right Their Wrongs With Advisors? [Time - 25:05]
So the ultimate question now is will TD Ameritrade do what it takes to make this right for advisors and our next generation clients? It's been horrifically damaging to trust. TD Ameritrade, you made us feel powerless. You hurt our businesses, you hurt our clients. You did the most damage to those of us who are the longest-standing, most loyal supporters of ETF Market Center and serving next-generation clients because the longer and deeper you were in that program, the more your business just got appended by these changes.
It doesn't feel good as a TD Ameritrade advisor to find out that you sold us out to the retail division and the highest asset management bidder to the detriment of our businesses and our youngest clients. It hurts our trust, it hurts our confidence in our brand, and our willingness to be your partner as RIAs. And especially your credibility as a champion of the RIA fiduciary cause when you put us in a position of absorbing all these adverse costs of your extremely non-fiduciary decision, to change your ETF lineup for your own profits.
That being said, you can make this right. There's a one month transition period, which means we have until November 20th to come up with a solution. I see at least three core options here:
- Just bring back the old funds and add the new ones. Because the problem here is not that you added all these new funds to the ETF lineup, the problem is the subtractions, not the additions. So bring these subtractions back. Make it not just 296 funds but 380 funds, including the 84 that you deleted from the lineup. If you want to, make it Institutional only. You can do what you want with your retail division, where you're simply a brokerage firm with no fiduciary duty, but don't undermine our fiduciary integrity as RIAs by eliminating our ETF lineup for alternatives so you can make money off of us.
- If you won't bring the funds back, at least grandfather advisors who were already on the platform. If you were an advisory firm that had an existing relationship with TD Ameritrade and already had any assets in ETF Market Center, grandfather those advisors by their Rep code so they can still get the old ETF lineup commission-free for their clients. Just impose the new list on new advisors, because new advisors, it's a reasonable list and they don't have any of the transition issues you've imposed on existing advisors. They can just pick from a robust lineup of 296 funds, including SPDR Portfolio ETFs.
- Just stop all these fake, "You get free ETFs, but you really don't because we make money on the back-end. And if we can't make money off on the back-end we'll change the ETF lineup until we do." Just stop, and offer a low-cost fee-based wrap account for advisors to use. We know you make money on these deals. You have a right to make money on your platform. I don't begrudge TD Ameritrade making a profit, but if you're willing to sell us out for 1 or 2 basis points off a SPDR Portfolio Core fund, just charge us 3 basis point as a wrap fee and make all the ETFs, 100% of them available with no individual trading cost. As an advisor, I think I would happily put our next-generation clients into a three basis point wrap account and be done with it, with every ETF available. Because frankly, if you don't, some other custodian will. The rumor is already out that Apex Clearing is trying to aggressively move into the RIA channel and is bidding for advisor business with a truly open architecture platform that just charges a flat fee of a couple of basis points and doesn't put us at risk of having our ETF lineups eliminated from the platform.
But at the minimum though, I beg TD Ameritrade leadership, extend the deadline for advisors at least for Institutional past November 20th. It is just not enough time for the amount of investment analysis and portfolio mapping, systems changes, paperwork changes, technology changes, new users of iRebal, current client communication, all of which has to happen because you're ripping out 84% of the ETF fund lineup with 30 days notice. Not to mention, maybe give the new ETFs a little bit of time to get some trading volume and make sure the bid-ask spreads are reasonable so we don't have to put our clients at execution risk trading in a brand-new ETFs.
So now it's up to you TD Ameritrade. You say you're trying to support fiduciary RIAs and help us serve the next-generation of clients, are you going to keep ignoring and glossing over all the advisors on your platform who got hurt by this change by just continuing to talk about all the funds that were added and ignoring the 84% that were subtracted, or you're ready to own up to the mistake that was made and make it right?
This is Office Hours with Michael Kitces. Normally 1 p.m. East Coast times on Tuesday, but obviously we're a bit later here this week, but I thought the news was too big not to tackle to head-on. So I hope this has been helpful for all of you who are advisors that are dealing with this change. Thanks for joining us, and have a great day.
So what do you think? Will you be impacted by TD Ameritrade's elimination of 84% of the existing NTF funds? How will you address this issue with clients? Do you think TD Ameritrade is headed towards a more retail-centric and less RIA-friendly direction under new leadership? Please share your thoughts in the comments below!