Can RIAs Provide a Lift for Ameritrade?

| About: TD Ameritrade (AMTD)

How do registered investment advisors (RIAs) play into the outlook for Ameritrade (NYSE:AMTD)? We see potential upside from increased focus on this service. But while opportunity exists, it is important to consider whether the company can really differentiate itself this way. RIAs seem to be a trend among other online brokerages and financial services firms too, like E-Trade (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC).

Our price estimate for Ameritrade is $22.65, roughly 10% above market price.

Understanding the Concept of an RIA

RIAs provide investment advice to investors to help them decide which type of investments would best serve their short-term and long-term investing goals. The term ‘registered’ comes from the fact that such investment advisors are registered with the Securities and Exchange Commission (SEC).

RIAs normally deal with high net-worth individuals (HNIs) or institutional investors. In return for their services, they charge an advisory or management fee. The fee is normally around 1% of the value of the assets managed by the RIA, although the rate can decline for higher asset values.

The Relationship Between RIAs and Online Brokerages

Online brokerages traditionally compete on factors like commissions & fees, types of investment products offered, research & advice for investors, and customer service. But as industry demands force brokerages to offer a one-stop shop for retail investment, these firms are becoming more and more alike.

RIAs contribute to the strength of an online brokerage’s research and advice capabilities. The information an online brokerage has about its customers’ investment appetite and trading history allows it to act as an intermediary between a particular customer and an RIA that would best suit that customer. This makes the hunt for an investment advisor easier for a customer, while the brokerage firm earns revenue from the RIAs – normally as a percentage of RIA advisory fees.

(Chart created by using Trefis' app)

How RIA’s Can Lift Ameritrade’s Value

Ameritrade provides personalized investment advisory services under the trade-name AdvisorDirect, [1] and any RIA interested in being recognized under AdvisorDirect is require to register with Ameritrade.

As the battle for new customers continues, we believe that an increasing focus on RIAs could give Ameritrade an edge in this regard. A nominal 5% increase in Ameritrade’s online customers over our base forecasts would add about 2% to our $22.65 price estimate for the company’s stock.

(Chart created by using Trefis' app)

This increase would, in turn, raise the value of interest-earning assets held by Ameritrade as well. If the value of these assets also increases by 5% over our base forecasts, it would add another 2% upside to the company’s stock value.

The combined 4% in stock value from these two scenarios would push our price estimate just above $23.50.

See our full analysis for Ameritrade here

Disclosure: No positions


  1. AdvisorDirect, Ameritrade, 2011