Wells Fargo Making Moves to Enhance ETF Trading Platform

By Murray Coleman

It has been four years since two big banks—Wells Fargo (WFC) and Bank of America (BAC)—first announced commission-free trading for ETF investors. Of course, a lot of strings were attached. Some of those have since changed, but Wells Fargo appears to still be the most flexible. (See related column here.)

Anyone thinking about using ETFs more widely due to the commission-free trading platform at Wells Fargo might be interested to know what’s going on in these times of financial failures. In short, the bank has been through (sometimes self-inflicted) hell.

Overall, Wells Fargo’s losses last year were the third-worst globally in that sector. The two bigger losers were the Royal Bank of Scotland (RBS) and Citigroup (C). Together, the top three lost a combined $160 billion. As noted in the Economist magazine, that was more than the gross domestic product of Egypt.

Nevertheless, it has decided to expand into investment banking, using many of the resources acquired through the $15.1 billion deal for Wachovia last year. A big attraction was the increased numbers of brokers that Wachovia networks into Wells Fargo—not only for investment banking, but also to boost advisement services.

In fact, if you add into the mix the 2007 purchase of the A.G. Edwards advisory network, Wells Fargo’s presence in ETFs is about to take a huge leap forward. Consider that, by some estimates, Wells Fargo had around 2,000 advisers using its platform to transact stocks, bonds, mutual funds and ETFs. That figures to swell to some 16,000 with Wachovia and A.G. Edwards thrown into the mix.

Bigger Plans In ETFs

The Wachovia deal got the most attention because Citigroup had originally struck an agreement to buy the struggling franchise. If you remember at the time, Wells Fargo’s swooping in to snag the bank brought down a host of attention from regulators and Citigroup shareholders.

However, in terms of ETF product lines, the A.G. Edwards move could prove more significant. “The combination of Wells Fargo and Wachovia was a big deal that made the combined company a major player,” said Bing Waldert, an analyst at Cerulli Associates. “But the A.G. Edwards acquisition takes them to a whole new level.”

Now, he says a bigger Wells Fargo brokerage network will compete directly against the combined Merrill Lynch and Bank of America set of advisory services. It will also have the manpower and resources to take on the recently formed joint venture between Smith Barney and Morgan Stanley in brokerage and advisory markets.

This summer, Wells Fargo is planning to complete most of its rebranding and integration of A.G. Edwards and Wachovia operations and services. Reports are surfacing of back-office problems that are causing transaction mistakes and other unusual problems for advisers and their clients. The bank says it has formed a group aimed at heading off future merger-related headaches. And for their part, Wells Fargo officials haven’t been denying that they’ve got a big task on their plates.

Wells Fargo declined to comment for this column. A spokeswoman deferred any interviews until after the merger process is completed.

If Wells Fargo can wind up its integration soon without too many hassles, more consolidation looms on the horizon for the industry on the whole. And that likely means more pressure on independent advisers, as big banks and brokers fight back against growing legions of independent advisers.

Diverging Marketplace For Investment Services

While advisers for Wells Fargo, BofA and others largely work out of their banks, fee-based financial consultants target customers from the confines of less-conspicuous surrounds. Often, independence also brings a greater ability to go to clients’ homes and work odd hours.

As a result, most ETF investors opting for Wells Fargo’s services will probably find it easier to do their transactions online. And if they want some help, it’ll cost more money—just like with independent brokers. But as brokers’ advisory services expand, in theory at least, their fee schedules and menu of services should start to move more in line with their independent competitors.

“There are subtle differences between marketing channels of a warehouse adviser and independent advisers. But in terms of services, they’re really in direct competition with one another,” said Waldert.

By his count, about a third of the 300,000 advisers in the U.S. are independent. Another 60,000 are affiliated with wire houses. The rest are part of regional broker-dealer networks such as Morgan Keegan, Robert W. Baird and others.

“There has been a trend of more advisers going independent in the past several years,” said Waldert. “But the vast majority is still affiliated with broker-dealers. And even many of those independents still keep some sort of affiliation to big broker-dealer networks such as LPL, AIG and ING.”

A.G. Edwards started creating ETF portfolios for clients in 2001. Meanwhile, Wachovia began creating model ETF portfolios for advisers in late 2005. Originally, they had nine model portfolios spread over several different risk profiles and styles to utilize. By early spring of the next year, Wachovia started offering to directly manage ETF portfolios for advisers. Initially, those portfolios were run by a team of strategists.

Reorganizing

Now, with a much bigger asset base and group of advisers, Wells Fargo has broken out its advisory services and ETF asset management team into a separate operation. The organization is combining strategists and dedicated portfolio managers into one, according to those familiar with the changes.

After the old A.G. Edwards investment committee—now with a mix of A.G. Edwards and Wachovia strategists, analysts and manager—decides on allocation strategies, it will hand off implementation to a committee, which also has a mix of ex-A.G. Edwards and Wachovia managers. The implementation committee reviews issues such as which ETFs to use, and makes sure portfolios are rebalanced and don’t overlap.

In early May, the legacy A.G. Edwards ETF platform had nearly $2.9 billion in assets, while the Wachovia ETF assets stood at around $1.5 billion, according to another source familiar with the merger process. Another $3 billion-plus was thought to be held in former Wachovia portfolios combining ETFs, stocks and other securities.

That makes the combined entity a huge service provider in the ETF universe. It should be pointed out, however, that the Wells Fargo brokerage handles commission-free ETF trades for do-it-yourself investors, while the newly formed Wells Fargo Advisors operation will provide advisory services—including portfolio management and more one-on-one consulting.

Although it’s a matter of debate about which is the best bank to use, investors keeping track might want to note that Wells Fargo appears to be bulking up in ETF advisory services. That’s a smart move for them. And it’s good news for ETF consumers.

It would be nice if BofA responds by lowering some of its minimum account size requirements for no-commission ETF trading. And a bit more flexibility in where your assets need to be stashed might be a step in the right direction.

Already, online brokers ranging from Sharebuilder.com to Foliofn are trying to play off discounted ETF pricing, offering bargain basement commissions. In the case of E-Trade, for example, it’ll refund commissions on your first 100 trades (with certain time restraints and based on specific types of account). Also, rival T.D. Ameritrade (AMTD) is doing much the same with a 30-day window for new customers to receive commission-free trading.

But you’ve got to do your own homework. This isn’t a recommendation of any company mentioned in this column. But the tide is clearly turning toward ever-cheaper ETF fees. This seems like a good time for individual investors and their advisers to do some comparative shopping.

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