How do registered investment advisors (RIAs) play into the
outlook for Ameritrade (
)? We see potential upside from increased focus on this service.
But while opportunity exists, it is important to consider whether
the company can really differentiate itself this way. RIAs seem to
be a trend among other online brokerages and financial services
firms too, like E-Trade (
), Charles Schwab (
) and Bank of America (
Our price estimate for Ameritrade is $22.65
, roughly 10% above market price.
Understanding the Concept of an RIA
RIAs provide investment advice to investors to help them decide
which type of investments would best serve their short-term and
long-term investing goals. The term 'registered' comes from the
fact that such investment advisors are registered with the
Securities and Exchange Commission (SEC).
RIAs normally deal with high net-worth individuals (HNIs) or
institutional investors. In return for their services, they charge
an advisory or management fee. The fee is normally around 1% of the
value of the assets managed by the RIA, although the rate can
decline for higher asset values.
The Relationship Between RIAs and Online
Online brokerages traditionally compete on factors like
commissions & fees, types of investment products offered,
research & advice for investors, and customer service. But as
industry demands force brokerages to offer a one-stop shop for
retail investment, these firms are becoming more and more
RIAs contribute to the strength of an online brokerage's
research and advice capabilities. The information an online
brokerage has about its customers' investment appetite and trading
history allows it to act as an intermediary between a particular
customer and an RIA that would best suit that customer. This makes
the hunt for an investment advisor easier for a customer, while the
brokerage firm earns revenue from the RIAs - normally as a
percentage of RIA advisory fees.
How RIA's Can Lift Ameritrade's Value
Ameritrade provides personalized investment advisory services
under the trade-name AdvisorDirect, and any RIA interested in being
recognized under AdvisorDirect is require to register with
As the battle for new customers continues, we believe that an
increasing focus on RIAs could give Ameritrade an edge in this
regard. A nominal 5% increase in Ameritrade's online customers over
our base forecasts would add about 2% to our
$22.65 price estimate for the company's stock
This increase would, in turn, raise the value of
interest-earning assets held by Ameritrade as well. If the
value of these assets also increases by 5% over our base forecasts,
it would add another 2% upside to the company's stock value.
The combined 4% in stock value from these two scenarios would
push our price estimate just above $23.50.
See our full analysis for Ameritrade here