Ameritrade CEO: Long-Term Investors Still Cautious

April 18, 2012 Jim McConville

Some indicators recently show a glimmer of economic hope, but a sizable segment of retail investors is not convinced that it’s time to again open up their wallets, say industry executives.

It’s the long-term investor, that average long-term retail investor that is actually still very cautious, said TD Ameritrade President and CEO Fred Tomczyk in a telephone interview after TD Ameritrade executives outlined the firm’s financial performance for its second fiscal quarter.

Joining Tomczyk on the call was Tom Nally, the recently named TD Ameritrade Institutional president who replaced TD Ameritrade veteran Tom Bradley in February.

TD Ameritrade Holding Corp.’s profit dropped 20 percent from a year ago on lower trading revenue as executives said retail investors remain on the sidelines despite this year’s strong gains in the stock market.

During TD Ameritrade’s online presentation, Tomczyk said that the online brokerage is averaging 370,000 client trades per day so far in April, suggesting a third straight decline in monthly trading volume. The forecast implies the Omaha, Neb.-based company’s trading activity is down 3 percent from March and 8 percent from a year earlier.

In the quarter, TD Ameritrade said its commission and transaction fee-based revenue fell 14 percent from a year ago to $292 million.

Average daily client trades at Ameritrade totaled roughly 388,000 in the latest period, down 12 percent from a year earlier, but up 5.5 percent from a weak fiscal first quarter. The year-ago period reflects some tough comparisons for TD Ameritrade though, as it was the company’s best quarter of trading activity to date.

Overall, for the quarter ended March 31, the company reported a profit of $136.7 million, or 25 cents a share, compared with a year-earlier profit of $171.7 million, or 30 cents a share. Net revenue fell 6.3 percent to $673.1 million.

Despite weakness in trading, TD Ameritrade fared better in its asset gathering business, though results still fell short of the year earlier. The company said it added $10.8 billion in net new assets in the latest period, down 6 percent from a year ago, though up from $10.2 billion in the previous quarter. Tomczyk said Ameritrade’s total client assets of $452 billion were double the company’s total three years ago and the highest in its history.

The numbers reflect tougher times for the company and its industry peers as the European sovereign debt crisis and concerns about a slowing economy have reined in trading volume.

When asked, Tomczyk said veteran retail investors are waiting to see if an economic and financial market recovery is for real this time, referring to a strong start in 2011 activity that ultimately subsided as problems in Europe ballooned out of control.

And supposedly like elephants, those retail financial investors appear to have long fiscal memories. From their point of view, they’re much more risk aversive; they have memories of the financial crisis and they have memories of feeling exactly like this last year when it (the market) disappeared on them in May, June and July, Tomczyk said.

Retail investors, says Tomczyk, are also waiting to see more tangible evidence that the economy is continuing to improve; that Europe is going to get through their issues.

More recently you are starting to hear more about places like India and China slowing down a bit. While thing are getting better here in the U.S. it’s slow, he said. But they continue to be quite cautious. You see that in exchange volumes that are light; you’re seeing that in mutual funds flows, whether it’s in our mutual fund flows, or the industry fund flows. It’s out of equity funds and into bond funds. Normally when these things happen and you have corrections, and particularly when you have the type of most severe crisis — the biggest one since the Great Depression — people have memories of that.

Tomczyk says veteran investors 50 years old and up are more likely to hold on tightly until signs of a clear-cut economic recovery appear. There’s no question that as you age, your risk tolerance decreases and your need for stability increases, he said. In contrast, young investors are more risk tolerant and continue to have a long view, and generally be more optimistic.

The two key economic metrics to watch, says Tomczyk, are unemployment and the gross domestic product (GDP). Right now, not it’s causing them not to invest, but what is causing them to think about it is, is the possibility of tax reform.

This fall’s presidential election, said Tomczyk, may also play a role in retail investors’ perceptions. Historically that usually starts to change the market one way or another, based upon the perception of what one may do and the other one may do.

When it comes to reassuring jittery retail investors, Tomczyk says TD Ameritrade’s sole role is to provide ample and accurate information to customers. It’s not our place to do, he said. hey’re going to form their viewpoint based upon on the market. Our strategy is to make sure that they have all the various products, services, tools, information and education.

But Tomczyk did offer retail investors one nugget of advice: Develop long-term investment and retirement plans. Stick with it through the good markets and the bad. That’s really the key to success over time.

-Jim McConville