Ameritrade Inc. plans to introduce an online investment platform at the end of this month that will use exchange-traded funds to attract assets from long-term, mass-affluent investors.
The Omaha online brokerage company said it will launch Amerivest, an online asset allocation service, for investors with $100,000 to $1 million of assets. The platform is to offer investors a diversified array of exchange-traded funds from Ameritrade’s nonproprietary ETF Center for low annual fees.
J. Peter Ricketts, the company’s chief operating officer, said the platform is part of Ameritrade’s effort to go beyond bread-and-butter services. From June 2002 to June 2004, Ameritrade doubled trading revenue and multiplied its net income 10 times over, he said, but 65% of its revenue comes from commissions paid by active traders.
“Going forward we want to create and offer tools that go beyond active trading,” Mr. Ricketts said. “We want to find ways to develop business with long-term investors.”
He added, “Ultimately we want to develop more business with the mass affluent.”
Larry Szczech, the managing director of client and product strategy at Ameritrade, said it currently manages only 25% of the assets of its 3.5 million customers. “These are individuals with more assets,” he said. “We want to gather more market share.”
Ameritrade has spent a year looking for ways to develop assets and build wallet share. Analysts say the company has always been able to offer a significant pricing advantage but that it lacked the products and services needed to develop more assets with existing customers.
In March Ameritrade announced it would start to pursue advisers with more than $50 million of assets under management. Its Ameritrade Advisor Services unit had for two years emphasized advisers managing $5 million to $50 million of assets, and it had $2.14 billion of assets under management at March 31, up from $200 million at the end of 2002.
As of June 30, the unit had $2.8 billion under management.
To appeal to larger investors, Ameritrade began offering managed accounts in March. Michael Feigeles, an executive vice president of institutional sales at Ameritrade, said the company is looking for the right products to develop new business. Ameritrade established its ETF Center in January, which offers nonproprietary exchange-traded funds from companies like Vanguard, Barclays, and State Street.
About $160 billion is invested in exchange-traded funds today, Mr. Feigeles said, and there is a lot of retail opportunity available in these products, considering that the first exchange-traded fund was opened only 11 years ago and 85% of exchange-traded fund assets are held by institutional customers.
“We will see exchange-traded funds transition over time to a product that is held more by individuals than institutions,” he said. “Exchange-traded funds can dominate the 401(k) market. I think in three to five years there will be $1 trillion in exchange-traded fund assets globally. … We think Ameritrade can help drive that growth.”
Low fees will help Ameritrade gather assets on the Amerivest platform, Mr. Feigeles said. The company will charge 0.5% for less than $100,000 of assets and 3.5% for accounts with more than $100,000, he said. Mutual fund companies charge two to three times that much for actively managed portfolios, he added.
“Right now, there are 100 million mass-affluent households, with $11 trillion in assets, and right now their investment of choice is mutual funds. We think that that can change,” he said.
Mr. Feigeles said Ameritrade is convinced it can accumulate assets by offering these products to the mass affluent. Because of inconsistent performance, high fees, and a lack of service, a large share of mass-affluent customers are “back in play,” he said.
“The conventional wisdom is that working with long-term investors is time-consuming and increasingly difficult to make money from as you go down-market,” he said. “We decided to throw conventional wisdom aside.”
