Steve Forbes Interview: Fred Tomczyk, TD Ameritrade !!

The Investor’s Pulse

Steve Forbes: Fred, good to have you with us.

Fred Tomczyk: It’s great to be here.

Forbes: You certainly have the pulse of the individual investor, as good as anyone. What’s the pulse right now? What’s the sentiment?

Tomczyk: I think the sentiment actually still continues to be relatively good. I think people are seeing the American economy coming back. However, there still is some uncertainty on the horizon with what’s going on in the Middle East and Japan, you know, inflation in India and China, things like that. But, you know, in our client base, we’re definitely seeing the RIA (Registered Investment Advisor) channel come back. We’re seeing the active trader come back. The long term investor started to come back in January and February, but right now is taking a little pause until we get clarity on certain things going on in the world.

Forbes: Do you find that even your individual investors get whip-sawed? They get out when they shouldn’t and get a little too giddy when they shouldn’t?

Tomczyk: Absolutely. I think it’s been a common trend for a long period of time; when the retail investor comes back, they wait for enough evidence that the market has come all the way back. And a lot of retail investors actually did miss the comeback in the market over the last year, because I think they reevaluated their risk profile and realize they needed to make some adjustments.

Forbes: So are they now really taking down their cash balances?

Tomczyk: There’s still a fair bit of cash. As I said, the RIAs, if they think about it — we think about it in three segments. The RIA channel, they’ve definitely brought their cash down. And they’ve been fully invested through this recovery in the market and through this recent turbulence. If you look at the active trader, they’ve also reinvested and been very active in the market. But the long-term retail investor just started to come back and is back sitting in cash, waiting to get some clarity on the uncertainties in the world today.

Indexing

Forbes: What’s your take on indexing? You know the rap — go with a few index funds. Why pay the fees? Managed funds or stock portfolios don’t do better, most of them, over time than an index fund. What do you say to those investors?

Tomczyk: Well, there’s a lot of evidence that that’s true. And I think what we’re seeing in our business, again, is I think a lot of traders use index products for their trading. They’re basically making certain kinds of bets, as opposed to just on a company. I think you’re seeing a more holistic use of index products by people — that they may use index products for a lot of asset classes, and try to add value selectively as opposed to trying to do it everywhere. We’re seeing that with our RIAs. They may use index products and have an overlay on commodities, or an overlay on certain option strategies. But for their core asset allocation, they are using index products.

Forbes: Traditional brokerage houses — do you see that trend still continuing, brokers breaking away and setting up their own shops?

Tomczyk: Absolutely. That’s been going on for a long period of time, the trend away from the traditional wire houses to the independent channels, whether it’s broker-dealer — we even find that once they go to the independent broker-dealer, then the next most logical step is to the independent RIA channel, which is a big business for us.

We have not seen that abate at all through the crisis. And even in today, we see it continue to be very strong. And I think that will continue. If you look at what’s going on with the fiduciary standard versus the broker-dealer standard and the regulatory reform, that could lead another wave to continuing that trend to the RIA channel.

Forbes: What do you offer to registered independent advisors? Why would they come to you?

Tomczyk: We give them a straightforward custodial offering. We actually advocate on their behalf. Because one of the problems when you go independent is basically, it’s hard to advocate on behalf of your industry or your channel. And the RIA channel is the fastest growing channel at wealth management today. Make no mistake about that.

So we advocate on their behalf in Washington. We also give them lots of technology in terms of helping them run their business. And we give them consulting services to help them understand how to better manage their business, whether it was to be more efficient or whether it’s growth strategies that we’ve seen other RIAs use successfully.

4-Year Tech Push

Forbes: Last year, you announced that you’re going on big new technology leap forward, so to speak, over four years. What exactly does that involve? And what can you reveal that it’s going to be doing and is doing for your customers?

Tomczyk: Yeah, for us, when we went through the crisis we had a solid balance sheet. And we decided to continue driving forward with our strategy. So we’ve made investments. The first leg of that technology strategy really was to upgrade and overhaul our technology infrastructure, the data centers, the servers, the networks, the phone systems and everything.

It put a good, solid foundation in place. We’re 90% done that. We’re still doing some work on that. And now, we’ll turn to the application layer and things for our clients. And in our business, over 90% of our interactions with our clients are through technology.

We leverage technology in everything that we do. And so it’s a very important component. And probably the next thing they’re going to see is we realigned our trading platform, and we’ll introduce a new web-based trading platform for active investors called Trade Architect, in May.

Forbes: And basically what’s that going to do?

Tomczyk: That’s going to be, in our view, the best web-based trading platform in the market. It’ll be free. It’ll have options and eventually will have futures and foreign exchanges on it. It’ll have all the logical tools that traders look at built into this one package versus being a plug-and-play that you got to go over here, and then you got to come back. It will also have a lot of innovation technologies in it, in terms of helping the client understand what different features and tools are.

Options, Options, Options

Forbes: Now firms like Fidelity in announcing the ability to do more currency trading, do investing in numerous currencies, what are you doing on that front? First, how really strong a trend is that individuals are now really going into options, really going into currencies, futures and the like?

Tomczyk: Well, there’s no question the big shift here is the increased use of options by the retail investigator and RIAs. That has been a growth part of the market now for the better part of five years or more. It may be more like ten. And you’ve seen the emergence of companies like thinkorswim, which we acquired a couple years ago.

Today, options and derivatives make up 30% of our trading volume and have become a very big part of our business. Now, the predominant source of that is options, which is about 25% of that 30%. We would be the leading option player in the United States today in the retail option trading space. When you all of a sudden become an options trader, it’s a natural extension to go into futures. And so we’ve added that functionality this year. And it’s increased with what’s going on in the world today and the movements and different currencies and whatnot, and what’s going on in the United States or other parts of the world– that increased interest in foreign exchange. So we’ve added that functionality, as well. But that’s still a relatively small percentage of our trading volume — foreign exchange.

Forbes: And we read that Schwab has now done optionsXpress. Paid a hefty price for it. They following your example?

Tomczyk: Well, I don’t know whether they’re following an example or not. But definitely, I’m assuming that Charles Schwab is seeing the same trends we are, the increased growth in the derivative space and the option space. And there are only a few firms that are really good at that. We think we are.

When we bought thinkorswim, it was the fastest growth player in the option space by far. It was the number one option trading house, and we were number two. So we clearly had that capability well embedded. And I think they’ve seen the same trends that we’ve seen, and decided to act on that.

Maintaining The Brand

Forbes: You’ve had some name changes over the years. How do you keep the brand?

Tomczyk: Well, we’ve always kept the Ameritrade name. There used to be TD Waterhouse and Ameritrade, and we put them together. We went to the TD Ameritrade brand. We think that made a lot of sense. It was also something that was important to our partner, TD Bank, who owns 45% of our shares, and has been an excellent partner for us. And we leverage them in a lot of things that we do, both domestically and internationally.

Forbes: Are you using their branches to get customers?

Tomczyk: Yes, we are. We started on that probably six to nine months ago where, for the first time in the United States, the leading online broker and the leading retail bank are coming together to try and get that referral flow going. It works very well in a Canadian market. They’ve tried it, but with different models in the United States. This is the first time we brought a leading online broker to a leading retail bank. And we think it’s quite exciting. It’s still early days, but the activity is starting to pick up.

Forbes: And what lessons did you learn in Canada from that? People have had this idea for years.

Tomczyk: Yeah. They’ve had this for years and I was involved in it because I come from up there. I would say to you that a large part of the success of TD Waterhouse in Canada, which is the largest online broker in Canada with about 50% market share– the secret has been leveraging off the relationship of the retail bank in TD Canada Trust, which is a powerhouse in Canada.

Forbes: So how exactly does that work?

Tomczyk: Well basically, you have to get into a model where if people are interested in wealth products or in banking investment products, that you make the referral from the retail bank who’s not well suited for that, to the online brokerage channel. And then the online brokerage channel has to come in and close that sale. But the key is obviously lining up all the reward and incentive and measurement systems in both organizations, and making sure it’s a win/win for both.

Institutions Vs. Retail

Forbes: Institutional investors — you’re one-third institutional roughly, two-thirds retail. Are you happy with that? What are you offering institutional investors? Why are they coming to you?

Tomczyk: We’re doing very well on our institutional channel, which is primarily the RIA space. That is the fastest growth channel in wealth management today in the United States. I think we’ve been pretty aggressive in terms of our technology offering, in terms of our marketing and sales and outbound call programs.

We’ve invested a lot in service and in our service proposition, in helping them succeed. And we just came back from our RIA conference in San Diego about a month ago. There were 2,500 people there. And I can tell you, I’ve never seen the attitudes of the independent RIA both generally but also towards TD Ameritrade. We measure something we call net advocate score, and I would say right now the vast majority of RIAs that are on our platform are net advocates for us and helping us land other advisors.

Forbes: Are there any lawyers from wire houses seeing who might be ready to jump ship?

Tomczyk: I don’t know about that. But there’s no question we get a fair number of our business there through the breakaway channel. I’m sure there was a number of wire-house reps there that are considering making that shift, that were in the audience that day.

Are Options Risky?

Forbes: Now in terms of options, those of us with gray hair think of options as risky. You have three myths of options. What are they?

Tomczyk: Well, I think the most important thing about options is that they’re used appropriately. It’s not something that you play with if you’re just making a bet. I think we always start people on options that want to learn about options with risk management and income generation types of strategies, whether that be covered call writing for income generation, whether that be protective puts, those types of things, that actually mitigate your risk in your portfolio.

That’s the first step of options — primarily, most people should be using them for risk management strategies, not for risky strategies. And then the second phase is — when they want to get into it more, if they want to make specific bets, speculative bets — to do that properly. And there are techniques to do that. If you’re going to make a directional bet, you always know your downside and you always cap it. It’s fine to take the upside. But you always have to know your downside. And so we get a lot of spread-base-type option trading. Those are the two main things that we teach people that want to do options.

Forbes: So we’re at a time when people are very cautious, and amazingly, what looks like a speculative instrument is now seen as insurance.

Tomczyk: Yeah, that’s true. But that is where most people started. It’s not unlike a lot of derivatives. They started out as risk mitigation strategies. What you have to be careful about is that they don’t turn into something much bigger and more dangerous.

Risky Business

Forbes: Flash crash. Do you think the lessons have been learned? Do you think it’s just inevitable that’s going to happen again, in some form or another?

Tomczyk: I do think the SEC has done a very good job of studying the flash crash and analyzing it. I wouldn’t say they are to the end of the job on that one. But I do think the number of the changes they’ve proposed and the number of changes they continue to look at, I’m not sure you’ll ever guarantee it’ll never happen. But I think that’s just life. The reality is, I do think they’re doing a lot of the right things and are on the right track.

Forbes: Do you see any bubbles out there?

Tomczyk: Well right now I think you worry that, with interest rates as low as they are, how you come out of this when interest rates do start to rise. And that will happen sooner or later. So you do start to worry about asset price bubbles, generally speaking. But right now, I wouldn’t say I see anything as an asset price bubble other than the natural forces of very low interest rates for a prolonged period of time.

Forbes: Do your clients do much in muni bonds?

Tomczyk: They do some in muni bonds, not a lot. We’re usually pretty cautious here to make sure that they have good ratings and we stay away from the riskier situations. We really don’t recommend much. Most people come to us and buy on a non-solicited basis. But even then, the munis that we make available, we try to be fairly conservative on.

Forbes: How much have you done in the way of studies of performance of individual investors against the now more self-directed? Are they doing any better than they would’ve done if they’d just stayed in an index fund?

Tomczyk: We actually don’t study it that much. And we actually don’t disclose it. But obviously, you look for people that are going through dangerous trading strategies and not succeeding. And we will reach out to them to try and help them be more sophisticated and more scientific about how they’re doing their trading.

We have a whole investor education business that can help people with that — use a more disciplined approach. And like I said earlier, to make sure that if you’re going to make bets and you’re going to trade, make sure you always understand your downside and you cap it.

Mobile Trading

Forbes: What do you tell investors, especially smaller ones, who say that the deck is stacked against them? Running all of these crazy exchanges, dark pools?

Tomczyk: We don’t get that question that often. We may get that comment once in a while. But I think the markets generally, over time, are pretty efficient. You do get the odd tail — although we don’t call it a tail — risk or unusual events. But I think the flash crash and the result after that was probably overblown from the perspective of the retail investor. We heard some of that. But we really didn’t see the impact of that as much as you might expect.

Forbes: Do you think the time is going to come with technology where the cloud gets bigger and bigger, where the individual can just do it all on his own — not going to need you guys anymore?

Tomczyk: I don’t know. I think they’ll always need a broker for regulatory purposes to execute it. I think the cloud is a technological term about how you process data and whatnot. And we use cloud computing in certain situations ourselves. But I think most investors realize they need to take their investments seriously. They need to have a plan, even if they’re going to trade. They’re not trading with necessarily all their money, but with a portion of their money.

Forbes: Handhelds, iPads, other kinds of pads — will we need banks anymore? Traditional, structured banks?

Tomczyk: It’s been a long running debate about whether you need bricks and mortar — everything was going to go online and to the web. We saw that with the advent of ATMs. We saw that with the phone. We saw that with the web. And you’re now seeing it again with mobile offerings.

And through all that, it’s never been one or the other. It’s all of the above. And we continue to see this trend where people do want to have a branch. Maybe not as much as they used to, but they still — if they have a problem — they want to know it’s there. Or they’ll go there to get certain advice and counseling and guidance.

But most times they’re going to interact with you through other channels. And that’s continuing. And the mobile offerings, we should make no mistake, this is going to continue. You look at people around, say, here in New York; you can’t walk down the street without somebody on a Blackberry or on an iPhone. The iPad was the most successful technology launch in history.

The iPad 2, you’re seeing it, is more popular than iPad 1. And so I don’t see this changing in any way, shape or form. We’re going to see an increased proliferation of available ways for people to interact with businesses. And you have to be there if you want to win for tomorrow.

Forbes: Fred, thank you very much.

Tomczyk: Thank you.

Click here to watch the Steve Forbes interview with Fred Tomczyk.

source: forbes.com

Posted in: Interview