Last month on March 20th, TD Ameritrade “informed” the roughly-150 RIAs in its advisor referral program that they must acquiesce to new terms, which for many will involve substantially higher costs, with a contract and an April 5th deadline to sign or be dropped from the program. The primary changes were a shift in the revenue-sharing agreement for advisor referrals from 25% of the advisor’s fee, to 25 basis points (regardless of the advisor fee) which drops to 10bps above $2M and 5bps over $10M; for those who charge more than 1% in AUM fees for million dollar accounts, the change would actually be a discount, but for most advisors who charge 1% or less – sometimes much less on large accounts thanks to graduated fee schedules – the change amounts to a substantial increase in the cost of the referral arrangement.
In addition, the 25bps fee will apply on referred assets, not just closed assets, which means if TD Ameritrade refers a $2M account but the client only agrees to have $1M managed initially, the advisor still has to pay 25bps on the entire $2M that was referred. Also notable was a big change to the exit rules – in the past, advisors who left TD Ameritrade would have to pay a one-time 75bps fee if they left the platform and took TD-Ameritrade-referred assets, but now the cost will be a 75bps one-time fee plus a 25bps trail for five years.
The shift comes at a time when TD Ameritrade is finalizing its Scottrade acquisition, which is expected to boost its branch network from about 100 locations up to a whopping 450 branches, and as a result, could turbocharge what is already a referral flow of about $25B to $30B per year to RIAs… but now with much higher revenue-sharing and retention terms for TD Ameritrade. Of course, the reality is that most advisors would and do gladly share revenue in exchange for high-quality referrals provided to them on a silver platter, and the buzz is that most firms have simply accepted the new terms and moved on – especially since firms already charging right around 1% AUM fees and closing most new business referred to them won’t see much change, and if they plan to stick with TD Ameritrade anyway the new departure provisions are a moot point.
Nonetheless, there were substantial rumblings about the way TD Ameritrade handled the rollout, providing many firms less than 2 weeks to read the notice and make a decision (once the letters physically arrived in the mail), and using the DoL fiduciary rule and its April 10th applicability date as the justification for the push (even though the rule has since been delayed 60 days) on the basis that TD Ameritrade had a conflict of interest by getting paid 25% of an advisor’s revenues (which meant advisors who charged more would result in a conflict of interest by paying more in revenue-sharing to TD Ameritrade).
Although ironically, in practice the new pricing structure will squeeze investment-only firms (that tend to have lower AUM fees for investment-only services, and might not be able to pay 25bps if they only charge 40bps to 50bps in the first place), in favor of more comprehensive financial planning and wealth management firms that charge a higher price point (for which 25bps is expensive but not fatal).