Ameritrade just announced a new service for retail investors that
offers automated asset allocation and rebalancing using ETFs. This is
clearly bad news for "full service" brokers and providers of separately
managed accounts. And although hedge fund managers don’t yet realize
it, Amerivest competes with them too.
First some background on Amerivest and why automated asset allocation is so compelling.
Ameritrade’s new product Amerivest works as follows. Investors use
an online wizard that determines their savings goals and risk tolerance
by answering a series of questions. They input the amount they want to
invest (a lump sum, regular contributions or both), and Amerivest
generates a suggested portfolio of exchange-traded funds (ETFs).
Investors can purchase the entire portfolio with a single click. They
can then monitor the portfolio, make additional investment
contributions, and rebalance back to the suggested asset allocation
with a single click. (Ameritrade suggests annual rebalancing.) The
fees? Similar to, but cheaper than a managed account: no fees for ETF
trades, 50 basis points for accounts below $100,000 and 35 basis points
for accounts above $100,000. Ameritrade’s implementation of Amerivest
is outstanding; you can see how clear, intuitive and un-daunting the
account set up is by taking the tour here.
I’ve argued since early 2003 that an online brokerage account that
offers automated asset allocation and rebalancing using ETFs is the killer retail investor product. Here’s what I wrote in A Better Way to Invest, a guide to investing using ETFs:
The larger online brokerages will have the resources to
develop better and better products at lower and lower cost. Look for
them to offer automated tools to make it easier for customers to
allocate assets and manage their portfolios… As the larger online
brokerages begin to focus on investors rather than traders, expect
their asset allocation and portfolio management tools to improve
Why is this product so compelling? Three reasons. First, the
combination of asset allocation, rebalancing and tax-loss selling is
far superior to the simple buy-and-hold strategy followed by most
retail investors. Second, low cost index mutual funds and ETFs are a
better vehicle for asset allocation than mutual funds. Actively-managed
mutual funds tend to under-perform their index benchmarks, and they
suffer from style drift and market timing (variances in net cash), both
of which make asset allocation far harder at the portfolio level.
Third, online brokerages are the right platform for ETF-based accounts
because they offer remarkably low trading costs.
Now, it’s clear that Amerivest and similar products that will no
doubt be rolled out by the other online brokerages are a serious threat
to the “full service