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Fred Tomczyk: Upcoming regulatory uncertainty could spark 'next wave' of wirehouse breakaways

Wirehouses may buy and sell parts to protect their golden egg-laying investment banking franchises

Tuesday, September 21, 2010 – 4:34 AM by Brooke Southall
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Fred Tomczyk: Whenever there’s uncertainty, it breeds opportunity. That’s where I think the next wave is.

When Ben Stein was entertaining the troops at the TD Ameritrade Institutional Western regional conference yesterday morning, Fred Tomczyk graciously slipped away to answer a few questions in the designated media room with RIABiz. See: How Tom Bradley had a bad sleep but led a good conference for TD Ameritrade

I had interviewed TD Ameritrade’s CEO in June but Tomczyk’s mind is ever-churning and I looked forward to his views on TD and the RIA business headed into Fall.

On everyone’s mind is what might be the next big driver of RIA assets. The channel’s growth has a steady but quiet [after early 2009] feel and there’s hope that some unforeseen factor could bump growth into overdrive again.

Tomczyk says he doesn’t know how the regulatory tussle over fiduciary care will shake out in Washington but he feels fairly confident of how it will impact his company’s recruiting of wirehouse brokers.

These advisors won’t know for certain whether the new rules could disenfranchise them or their companies and many of them won’t want to stick around to find out.

Next wave

“Whenever there’s uncertainty, it breeds opportunity. That’s where I think the next wave is,” Tomczyk says. “The RIA model is a certainty.”

The wirehouses are likely to err on the side of protecting their greatest money-making franchises – new issues and fixed income.

“Some will sell parts of the business; some will buy,” Tomczyk says. This next round of maneuvers will cause attrition.

Beakaways aside, the big question the CEO gets asked most [it seems] is what plans he has in store for that $1.2 billion of liquid assets sitting on the balance sheet of TD Ameritrade. In the past Tomczyk has alluded to buying E*TRADE but this time he said there was simply nothing in the offing.

Doing nothing is safe but there’s still an issue: cash sitting on the balance sheet can bring down return on capital.

“It’s a lovely problem to have,” Tomczyk said.

Still, he allows that there are plenty of things that the company is planning to invest in closer to home. Since merging TD Waterhouse and Ameritrade, the company has been wrestling to be sure its most basic back office functions were rock solid. This has largely happened though there are a few finishing touches that remain.

The implications of reaching this threshold may be profound for RIAs. “Having the right foundation was the right first step,” he says. “We’ll now turn to the applications.”

Gee-whiz applications

Back offices are boring and Tomczyk compared its bullet-proof functionality to what a utility does in keeping the lights on. Applications are the gee-whiz things that software can do to do save time and money.

Virtually all of TD’s competitors are adding applications to their platforms like crazy as they create ecosystems. See: Schwab’s Project C now has two tiers and three new names. But Tomczyk sees a sameness in the competitve efforts that he believes TD can trump.

“Most people make the mistake of saying: we have the solution for you” he says. “...I just don’t think that people are going to accept that.”

Indeed, TD has yet to fully lay out its plan for applications but Veo will be upgraded and made accepting of a wide variety of applications from industry applications. See: Joining the industry-wide trend, TD Ameritrade announces its upcoming project for 'open architecture’ technology integration.

In light of TD’s burdensome $1.2 billion of liquid assets, I brought up Charles Schwab & Co.’s recent acquisition of Windward Investment Management of Boston and I wondered whether TD would rule out that kind of purchase. See: A look inside Schwab’s big deal with a small asset manager.

“I don’t think that we’d necessarily shy away from it. Certain advisors may want to use it. The key is not to force it into your system,” Tomczyk said.

Scottrade factor?

Though Schwab is a big competitor that TD looks up to on the size chart, I also asked him his view of Scottrade, the company seemingly most determined to nip at his company’s heels.

He noted that Scottrade tends to have a Wal-Mart-like strategy of situating itself in secondary cities and having small branches. Scottrade is hard to research because it is privately held, he added. See: Scottrade rakes in small RIAs.

But Tomczyk respects what he sees at the St. Louis-based discount broker.

“They do a lot of things well,” he says.

One thing Scottrade does not do but Schwab does is to offer advice in its branches. TD may edge in Schwab’s direction – but only slightly.

Advice uptick

“We do advise and we’ll probably do a little bit more; we do allow [TD] people to recommend Amerivest” he says.

Amerivest are essentially model portfolios managed by TD Ameritrade.

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