Exclusive: TD offers refunds to managed-accounts customers with losses

Firm joins Schwab in trying to soothe unhappy clients

Aug 21, 2014 @ 11:39 am

By Trevor Hunnicutt

TD Ameritrade Inc.'s retail advisory service this week received a green light from securities regulators to offer a full refund of fees to customers whose investment portfolios decline in value.

The brokerage plans to offer the rebate to new clients of its Amerivest managed-accounts service, which currently costs between 0.3% and 1.25% of assets annually, if their investments post negative returns in two consecutive quarters.

An outline of the rebate program was laid out in a letter to regulators by lawyers from Morgan Lewis & Bockius who are representing TD.

“It's a program by which we hope more people will try Amerivest if we remove one level of doubt or concern,” said TD spokesman Joseph A. Giannone.

The rebate program comes nine months after rival Charles Schwab Corp. announced its own rebate to unhappy customers and as both firms look to increase the popularity of their proprietary advisory offerings.

Amerivest is similar in some respects to other online managed account services, which are sometimes called robo-advisers. It begins with a client questionnaire to assess factors including an investors' time horizon and risk tolerance and offers an automatically managed portfolio.

Mr. Giannone said Amerivest is not comparable to robo-advisers because TD's clients have access to branches, call centers and "award-winning" technology.

Fees from investment products, which include Amerivest, accounted for a tenth of TD's revenue in the quarter ended June 30, according to the company's earnings presentation.

Schwab said in December it was rolling out an “accountability guarantee” that would allow some of its advisory clients to request a refund of the prior quarter's program fees “if, for any reason, they are not happy.”

(See also: SEC cracks down on wrap accounts)

Schwab has received "around 550" requests for refunds, "which represents less than one percent of total eligible accounts," according to Michael Cianfrocca, a spokesman.

Mr. Giannone, the TD spokesman, said its rebate was planned long before Schwab's guarantee, but didn't respond to a request to substantiate that claim. In addition to new clients, the program would also apply to existing clients who deposit $25,000 in new assets.

“The average investor simply doesn't trust our industry, and with good reason,” said Scott Hanson, a financial adviser with Hanson McClain Inc., which uses TD Ameritrade, Schwab and Fidelity Investments, another brokerage competitor, to hold client assets in custody. “Much of the marketing and advertising in our industry is about creating perceptions — can we get a client to perceive we are on their side? These money-back guarantees sound a little gimmicky to me, but I guess there is someone on Madison Avenue who believes they will change consumers' perceptions.”

In a letter, Securities and Exchange Commission staff lawyer Kyle R. Ahlgren said the regulator was not going to try to block the program despite legal restrictions found in the Investment Advisers Act of 1940 on investment professionals sharing in the capital gains of their clients. The regulatory agency said the fact that TD does not select securities itself mitigates concerns the fee arrangement could put clients at a disadvantage or encourage taking excessive investment risks.

Morningstar Inc.'s managed-accounts division provides the asset allocation targets and selects investments for TD's program. The firm is paid licensing and asset-linked compensation, rather than performance fees, for that service, according to TD's lawyers. Morningstar did not respond to requests for comment.

The regulatory notice came in the form of a “no action” letter on Tuesday, which promises the TD that that the SEC staff would not recommend to its five-member commission any legal action blocking the rebate. Todd Cipperman, a regulatory compliance lawyer, penned a blog about the letter Thursday.

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