Brooke’s Note: Recently TD Ameritrade came out with a better unified managed account program than the competition. Now its ETF program looks — hands down — to offer advantages. Smaller players have always been the agents of disruption and change. TD Ameritrade continues to warm to its role of small enough to be nimble and — post TD Waterhouse-Ameritrade merger integration and backed by the cash of TD Bank that never faltered in 2008 — big enough to make some varsity moves against larger competitors.

TD Ameritrade Holding Corp. last week unfurled a an ETF platform with the potential to send tremors through the world of financial advisors, investors, providers of exchange traded funds and competing discount brokers.

Consistent with a recent pattern of disruptive competitive behavior, the Omaha, Neb.-based parent of the number three asset custodian is allowing advisors to trade 101 of the larger, more popular ETFs for free. This compares to only 11 commission-free ETFs from Charles Schwab & Co. and 25 commission-free ETFs from Fidelity Investments.

Unsurprising

“It doesn’t surprise me that TD Ameritrade is more flexible and aggressive in providing a larger universe of ETFs” as the number-three player, says Paul Weisbruch, vice president of ETF sales and options for Street One Financial, a King of Prussia, Pa.-based company that helps RIAs to lower their costs in trading ETFs. “It makes sense to me [that they’d gamble by offering a loss leader]. Otherwise there’s no differentiating factor.”

In contrast to other custodians, TD Ameritrade will not receive major revenue from the underlying exchange traded funds.

Fidelity gets paid by BlackRock for making iShares the exclusive product-line on its no-transaction-fee ETF platform. Schwab receives revenue from its free-ETF deal because all the products are Schwab-branded. That allows the company to collect revenues from the underlying management fees.

TD Ameritrade receives no revenue for trades on its ETF Market Center except for a $20 charge for ETFs on the list that are bought then sold in a 30-day period. [RIAs interviewed for this article found this caveat fairly trivial because they mostly trade for the long term.]

Vanguard gets a foothold

The two largest providers of ETFs on TD Ameritrade’s platform are BlackRock and Vanguard Group respectively. See: Coming from behind, Vanguard is gobbling up ETF market share

TD Ameritrade has an element of objectivity in its ETF offering. Morningstar Associates of Chicago chooses the ETFs that make its free list. Schwab selects only its own funds and Fidelity is restricted to the iShares universe.

Though the new TD Ameritrade offering seems to be a pure loss-leader, TD Ameritrade believes that it will be “revenue-neutral,” according to Matt Judge, director of wealth management solutions for TD Ameritrade.

“We want increased share of wallet. We’re trying to encourage consolidation of accounts to TD Ameritrade.”

The change by TD Ameritrade will significantly improve how well San Francisco-based Polaris Equity Management, for one, is able to serve its clients, according to its president and CEO, Jeff Powell. His firm manages $215 million of AUM and most of those assets are held in ETFs.

“We are big proponents of [TD’s new program]. This will allow us to be more active with our management of smaller accounts.” About half the ETFs Polaris buys are among the 101 ETFs offered on the new TD platform, Powell adds.

Eating away at returns

He gives the example of a $20,000 portfolio managed on behalf of a client’s child that holds 20 different ETFs. At $10 a trade, a rebalancing could cost $200, which amounts to 1% of the value of that portfolio. “That’s eating away at returns without considering management fees or our own fee,” he says.

This pricing difference is significant enough that it is likely to make TD Ameritrade’s competitors like Schwab and Fidelity re-evealuate their own offerings, according to Weisbruch.

Fidelity will take its cues from clients, according to Fidelity’s spokesman Steve Austin.

“Naturally, we will evaluate this offer over time based on customer preference,” he said.

Austin adds that Fidelity is pleased with how its free-ETF program is working out.

BlackRock partnership

“We are happy with our partnership with BlackRock,” he says. “We now have tens of thousands of customers that now own at least one of the 25 commission-free iShares who did not own any of the 25 when the offer became available in February.”

Schwab declined to comment but sent a list of features of its free ETF program. Generally its ETFs have the lowest operating expense ratios in each of their respective categories. Another advantage: investors can buy as little as a single share of an ETF.

Doug Dannemiller, a senior analyst with research firm Aite Group of Boston, says that pricing differentials between ETF providers is only one factor that advisors consider when evaluating the products.

“If you’re in the ballpark on price, you’re fine,” he says.

Still, Joseph Leitman, managing director of portfolio management and investment operations for Mclean [Va.] Asset Management says that TD’s offer “leapfrogged” the competition and will be beneficial to his company’s business.

McLean manages $425 million of assets and it invests primarily in mutual funds from Dimensional Fund Advisors of Santa Monica, Calif.

ETFs and DFA funds

His company is starting to become a separate accounts manager and it may make greater use of ETFs in that sub-advisory portion of its business. TD’s ETF pricing encourages that mode of investing.

On the high net worth side of the business, his company often uses ETFs when it sells a DFA fund to harvest a tax loss. It buys the ETF that best approximates the holdings of the DFA fund until 30 days passes to comply with the IRS wash rule.

Dannemiller says the downward pressure on ETF pricing is a remarkable phenomenon that may continue to gain momentum – though it defies the law of supply and demad.

As demand increases for ETFs, the prices only seem to be falling. He points to Vanguard’s report last week that it is lowering the minimum investment necessary for an advisor to buy the Admiral class of Vanguard ETFs on behalf of clients from $100,000 to $10,000.

The big losers as ETFs get cheaper — especially in world of advisors concerned with providing fiduciary care: mutual funds, Dannemiller adds.