Monday, June 12, 2006

TD Ameritrade CEO Interview

BusinessWeek, Karyn McCormack, 12 June 2006

One-time college coach Joe Moglia, now CEO of TD Ameritrade, talks about the discount brokerage's growth, current strategy, and poker pals Warren Buffett and Bill Gates

After living in Omaha for more than four years, Joe Moglia finally met the city's most famous resident -- legendary investor Warren Buffett. "I've actually got a one-to-one dinner coming up with him, and have already had two dinners with him," gushes the 57-year old CEO of TD Ameritrade. Moglia even played poker with Buffett and the Berkshire boss's good friend, Bill Gates.

Perhaps rubbing elbows with corporate titans -- and his long stint as a football coach -- have taught Moglia, a New York City native, a thing or two about winning in the markets. For the moment, the early June swoon in stocks hasn't seemed to rattle the chief of the discount brokerage, which thrives on trading volumes. Moglia admits that the slump in TD Ameritrade shares, recently down 43% from a 52-week high in January, reflects that a typically slow time of year for brokers in general is approaching. "I wouldn't look at any of this as a significant trend one way or the other," he says.

After completing eight acquisitions in five years -- the largest being the $1.7 billion TD Waterhouse deal in January -- Moglia continues to prowl for companies that will diversify the firm's revenues and boost growth. The promising opportunities for the company, he says, are products for financial advisers and long-term investors, such as a portfolio allocation tool that uses exchange-traded funds.

Karyn McCormack of sat down with Moglia last week in New York City, where they talked about his game plan and how he met Buffett. Edited excerpts of their conversation follow.

Do you see more consolidation among discount brokerages?

When I got to Ameritrade in the spring of 2001, there were around 200 firms that had online brokerage presences in the U.S., and about 16 names that everybody would know. Today, that number is about 70 overall, and there's probably five names that everybody would know. There's still some excess capacity in the industry, and that suggests there will still be some more consolidation, but not nearly so much as we've had up until now.

Are you planning more acquisitions?

We would look at doing anything that ultimately winds up in the best interests of our clients and shareholders. If we were working on something right now, I wouldn't be able to tell you. It's part of our standard operating procedure. We're looking at those types of things every day.

What's the company's strategy? What are some growth areas?

We've always been a leader in the space where an individual just wants to buy and sell stock -- essentially the active trader space. With our acquisition of TD Waterhouse, we are becoming far more aggressive in the long-term investor space, as well as the independent adviser area. We think that there's significant growth in those areas.

Are you expanding the branches acquired from TD Waterhouse?

When we bought Waterhouse, we inherited about 145 branches. Today we have around 100. We closed the ones we felt were not productive. We will continue to open branches or grow the branches we have if we think it's going to make sense economically.

From a competitive standpoint, what sets your company apart?

One competitive advantage is we've got tremendous ability to scale [trading volume]. For example, today we're doing approximately 270,000 trades a day. We could do close to 600,000 with a very minimal incremental technology capital spending.

Second, our operating leverage is very powerful. We actually went eight quarters in a row with pretax margins over 50% -- that would put us in the 98th percentile in the S&P 500. So there are a couple of things that I think we do very well that has, ultimately, a good impact on the individual client experience as well as a good return for the shareholder.

Speaking of trading volume, what's the trend? Are are you concerned?

As far as this quarter goes, April was better than March. May saw consistency along that same type of trend, and June is a little bit too early to tell.

But I think when you think about retail trading volumes in general, it's important to keep in mind that the individual investor is a lagging indicator in terms of what goes on in the markets. So as the markets do well, you're going to have people get more involved, do more trades, open up more accounts. And that's primarily what we've been seeing over the last few months.

With the market being weak, your stock has been down along with other brokerages. Do you see a recovery?

If you look at our stock specifically, our market cap in the fall of 2001 was $700 million. Today it's closer to $10 billion. In January, we paid a $6 per share dividend, which was one of the largest in the history of Wall Street. So it's been an incredible run for our shareholders, and I think there are very few shareholders that own TD Ameritrade stock today that aren't delighted with the progress that we've made.

Having said that, there has been a little bit of a lull in the action. Financial services in general have come off. We are entering our seasonably slow time as far as the markets go, and financial services in general goes. So I think that's basically what you're seeing. I wouldn't look at any of this as a significant trend one way or the other.

For consumers, what's the most useful area or tool on your website?

We're trying to do a better job of education. We think that exchange-traded funds are one of the best investment vehicles for individual investors. The ETF market has exploded, but 90% of that market is institutions.

So the institutions get it -- they understand it. The retail investor doesn't quite know what an ETF is. We've created an ETF Center where people can go and learn. It's in our best interest to do as much as we can to better educate the investor, because nobody else is going to.

And for the individual trader or investor, we try to provide products and services that better allow them to construct a portfolio that's in line with their risk or better manage their risk.

What is that product?

We created a portfolio-allocation service called Amerivest. First you establish your goals, then your risk tolerance. That then gives you a customized asset allocation where you have diversification amongst asset classes -- like cash, bonds, stocks, and within each of those components, diversification. This all gets funded through ETFs, so you get market-like returns at a low cost.

As the market moves and the portfolio gets off track with regards to your asset allocation guidelines, you press a button and it will tell you what you need to sell and what you need to buy to get back in sync. If you have $100,000, we can do that for 35 basis points. There's nobody that can do that. We're excited about it.

Before coming to Wall Street, you were a former a football coach.

I coached football for 16 years. My last coaching job was defensive coordinator at Dartmouth. In fact, I wrote a book on football. And I wrote a book published a couple of years ago on investing. You may know a lot of people that have written books on football, and you may know a lot of people that have written books on investing, but you don't know anybody that has written books on both of those topics!

Do you see similarities in the two?

There are similarities. At the end of the day, as far as coaching goes, your objective is to win. Your objective is to be able to pull together a program that combines the skill sets of a lot of different individuals, and understand what your strategy is vs. other teams' strategies.

In business, your job is to figure out how to bring groups together with different skill sets in a way that will benefit the experience for your clients and deliver good shareholder value. And you have to be able to provide sustainable, profitable growth over a period of years.

You live in Omaha. Have you ever met Warren Bufffet?

Yes, we met for the first time recently. I suggested to Liz Clayman, one of the anchors at CNBC, that she interview Buffett for a book she's writing on investing. When she got the interview with Buffett, my name came up and he said he had not met I called and asked him if we could get together.

I've actually got a one-to-one dinner coming up with him, and have already had two one-on-one dinners. One day we played a poker game where he had Sharon Osberg, who's a two-time world champion bridge player and his bridge partner, and Bill Gates. It's great, he's a wonderful guy.

Is he investing in the company, or planning to?

No. If he is, he hasn't shared that with me.... Maybe he just likes me.