Tension in the three-way relationship between Fidelity, Dimensional Fund Advisors and the RIAs who use both vendors creates opening for Tim Hockey

April 24, 2017 — 6:33 PM UTC by Lisa Shidler


Brooke's Note: What happens in the RIA business when unstoppable force meets immovable object? If the force is Dimensional Fund Advisors and the immovable object is Fidelity or Schwab, DFA goes and makes a deal with a swayable TD Ameritrade. DFA knows that if RIA customers, with their $200 billion-plus slice of AUM out of the whole $460-billion DFA pie, have to choose between it and a given custodian, the custodian is likely to lose. Though Fidelity declined to comment for this article, it already made its position clear in 2014 as to why it was raising published transaction fees on DFA yet slashing them for most other mutual fund companies. See: Fidelity Investments soon to jack up commissions on DFA and Vanguard Group mutual fund tradesWhy? In short, because most others pay unseen non-transaction fees and DFA doesn't. Raising the transaction fees was a way to balance things out. But in the free market, what's balanced and what the market tolerates can be two different things. TD Ameritrade is apparently exploiting those microeconomics, though it has yet to reveal the full scope of its deal with DFA. The question now is what happens next? Will Vanguard attempt a similar pricing play or will Schwab, Pershing and Fidelity simply have to cave on price to match TD? In the stultifyingly static world of RIA asset custody, and as the industry slouches toward passive investing, this could be the pricing storm that comes before the fee-eviscerating tsunami, which breaches the sea walls of RIA custody cove.

Dimensional Fund Advisors has forged a favorable deal on behalf of RIAs that custody assets at TD Ameritrade Institutional -- a deal that may give the mutual fund giant fresh pricing leverage with the two largest RIA custodians.    

The Austin, Texas-based mutual fund giant has entered into a "strategic relationship" with the No. 3 RIA custodian that involves multiple aspects but starts by slashing DFA mutual fund transaction fees to $9.99 -- a cut of 67% from the highest online trading fee of $31. See: TD Ameritrade shocks RIAs most accustomed to its largesse with a letter, a contract and a tight deadline to sign.

The deal came to light during TD Ameritrade's quarterly conference April 19 when the Omaha, Neb.-based firm's CEO, Tim Hockey, boasted of the landmark accord. 

The assets of some of the largest and most prestigious RIAs are managed almost exclusively by DFA. Those assets tend to sit with Schwab Advisor Services or Fidelity Clearing & Custody Solutions.

"...We recently joined forces with Dimensional Fund, the largest mutual fund family on our platform in a strategic relationship that allows to leverage each other’s vast distribution network," Hockey told analysts on the call. See: Tim Hockey invites channel-conflict question before TD Ameritrade's RIAs, sets good tone at LINC conference.

But he added: "It also makes DFA funds available to advisors for a reduced rate and introduces new educational and practice management resources. We’re evaluating other opportunities as well and we’ll share more once details have been finalized."

DFA declined to comment for this story.

Signal move

Though TD Ameritrade declined to explain how DFA and TD can "leverage each other’s vast distribution network," a spokesperson confirmed in an email that the pricing change is for real. See: Dimensional Fund Advisors to launch 13 target date funds but can its RIA 'cult' deliver success? 

It's also a move with possible far-ranging repercussions, according to Alex Potts, CEO of Loring Ward, a DFA TAMP in San Jose, Calif. 

"I fully expect Schwab, Fidelity and Pershing to reach out to DFA and see how they can do the same."

Loring Ward holds $6.5 billion of its $14.8 billion of managed assets with San Francisco based Schwab Advisor Services, with the balance sprinkled between Pershing Advisor Solutions and TD Ameritrade Institutional (both based in among Jersey City, N.J.) and Boston-based Fidelity.

But the manner in which Fidelity arrived at its pricing on DFA trades raising questions, including how it prices trades on Vanguard funds.

TD Ameritrade's price cut is perhaps meant to exploit the friction that arose between RIAs and Fidelity three years ago when Fidelity announced it would slash commissions on mutual fund trades for 99% of mutual fund groups.  On Jan. 1, 2014, Fidelity reduced the majority of all buy and sell trades from $40 to $30, making the $60 “round-trip” a 25% reduction for funds on Fidelity Institutional’s FundsNetwork platform. See: Fidelity Investments soon to jack up commissions on DFA and Vanguard Group mutual fund trades.

But as it reduced those fees, Fidelity raised them on the mutual funds arch rival Vanguard Group of Malvern. Pa. and a small handful of other companies including DFA. Back then, the commission hikes were explained by Fidelity spokeswoman Erica Birke as a reasonable leveling of the playing field.

'Not compensating'

“The reason we’re adding this charge is to address some disparity among the funds on the FundsNetwork platform. Unlike 99% of the fund families on the platform, these firms noted are not compensating Fidelity for administrative and shareholder services that Fidelity performs on their behalf," she said. "These services include but are not limited to, processing trades, dividends, answering questions, delivering required documents, supporting client inquiries and problem resolution, web and trading infrastructures, compliance and reporting to the fund.”

Level playing fields aside, the fact that Fidelity now charges four times more for DFA funds than the new TD Ameritrade rate is a factor RIAs can't ignore, says Christopher Van Slyke, managing member of WorthPoint LLC, an exclusive DFA advisor whose firm holds most of its more than $443 million assets with TD Ameritrade. 

"That pricing is very persuasive," he says. "As fiduciaries we'd have to consider TDA the favorite."

WealthPoint is based in Carefree, Ariz.

Terminating relationship

Alex Potts: I fully expect Schwab, Fidelity and Pershing to reach out to DFA and see how they can do the same.

Three years ago, Van Slyke kept a portion of his client assets with Fidelity but was irked when the firm issued the DFA price hike. "We didn't immediately move away form Fidelity but we did end up terminating that relationship. The price hike didn't help them." See: Dimensional Fund Advisors to launch 13 target date funds but can its RIA 'cult' deliver success?

The biggest disparity will be purchase commissions, which will be $30 for most funds but 66% more, or $50 for funds from CGM Funds of Boston; Dimensional Fund Advisors of Austin, Texas; San Francisco-based Dodge & Cox Funds; and New York-based Sequoia Funds.

Those price hikes came as Fidelity slashed commissions on mutual fund trades for 99% of mutual fund groups, reducing the majority of all buy and sell trades from $40 to $30, making the $60 “round-trip” a 25% reduction for funds on Fidelity Institutional’s FundsNetwork platform.

TD Ameritrade is currently the only RIA custodian that offers a special deal for DFA funds. A Schwab spokesperson said the firm charges the same transaction fees on mutual funds managed by all asset managers. A Fidelity spokesperson declined to comment when asked if the firm's fee structure has changed. 

New CEOs, new deal

The deal comes to light at a time when TD and DFA have new CEOs at their respective helms; Hockey became TD Ameritrade's CEO Sept. 30 and DFA David Butler became co-CEO in February alongside Eduardo Repetto. See: New TD Ameritrade CEO, fresh from bank, will 'reassess' putting TD brand on products and redefining open architecture

Butler is the DFA executive who has worked most closely with RIAs during the past decade. As Dimensional Fund Advisors' AUM nears half-a-trillion, David Booth yields his co-CEO duties to David Butler.

Many large, successful RIAs have built practices using these DFA funds as building blocks. While Fidelity's decision three years ago had a sharp emotional impact on RIAs, it's unclear how many RIAs moved assets away from Fidelity in light of its move three years ago. Likewise, it may be difficult to gauge the effect of TD's recent pricing decision.   See: Fidelity loses some RIA assets over its new DFA/Vanguard fees but other RIAs crunch the numbers and soldier on

But RIAs are certainly cheered by the price cut and hope it leads to other custodians following suit. A warming relationship between TD Ameritrade and DFA is good news, Potts adds.

"I like that DFA and TD are working on bettering their relationship. Not to say it was bad in the first place. I think the idea that the primary custodians and fund companies are trying to drive down costs and improve service is terrific for the end clients and the advisors."  See: TD Ameritrade shocks RIAs most accustomed to its largesse with a letter, a contract and a tight deadline to sign.

War drums

But Potts also acknowledges many factors contribute to the decision to use a custodian -- not just price alone.

"What has already happened, the custodians are in a price war, so the variance in price between the firms is pretty small," he says. "Advisors can pick which firm they think will perform the best services. The slightly lower trade price will help, but the services are every bit as important as the price decision." See: Schwab launches biggest RIA-targeted price war in years -- but TD and Pershing say they won't play along.

Van Slyke is pleased to see the price change. "Our clients do benefit from the lower trade costs. It's always good when your two primary business partners decide to play nice," he says. 

WorthPointe, with locations in Austin, Texas and La Jolla, Calif. works with 300 families and has eight lead advisors on staff.

TD Ameritrade Institutional and DFA have forged a strategic relationship "to support the fiduciary advice marketplace and improve the services we offer advisors," says TD Ameritrade spokesman Joe Giannone, who adds that new educational and practice management resources will be introduced as well.

"The two companies who did more to help me be successful as an RIA than any others were TD Ameritrade and DFA," says Bryan Wisda, currently president of Almega Life Solutions, a life and disability insurance agency in Carefree, Ariz.

Wisda, who sold his RIA in 2015 but still offers assistance to the RIA who bought his business, says this partnership makes perfect sense. 

"Both new RIAs and seasoned RIAs should be extremely excited TD and DFA are looking to do something together," he says.

Mentioned in this article:

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally

Share your thoughts and opinions with the author or other readers.


Jim Cannon said:

April 24, 2017 — 8:29 PM UTC

It is not surprising, but interesting how a firm like DFA that has a long range objective of always seeking to find ways to improve client outcomes can create arrangements such this one. The buzz around our firm has been incredible about this change and now we're faced with how to address the significant disparity that exists across at other custodians where our clients at Dynamic Wealth Advisors hold assets. There does become a point at which it is not appropriate to hold assets at certain custodians (or at least to recommend to clients that they not hold certain assets). Like Mr. Van Slyke noted, I think we may have reached that with DFA's arrangement with TD Ameritrade.

Stephen Winks said:

April 25, 2017 — 4:33 PM UTC

Finally, an awaking to the client's well being as a catalyst to innovation. On this basis, the fiduciary duty of the advisor and professional standing in advisory services will endure for all the right reasons. SCW

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