The groundwork behind TD Ameritrade

FST speaks with Jerry Bartlett, CIO of TD Ameritrade, about the technology behind the acquisition, what it took to bring together approximately 800 staff and six million clientele under one roof, and the powerhouse brokerage’s plans for continued expansion.

By Leslie Knudson

As a product of one of the largest mergers in the online brokerage sector, TD Ameritrade hit the ground running. After merging legacy Ameritrade with legacy TD Waterhouse in early 2006, the firm reported its best quarter yet in mid-January 2007, announcing a 14 percent rise in net income from the previous quarter to $146 million. It also witnessed a significant spike in trades, handling an average of 237,538 trades per day during the first quarter, opposed to the previous year’s first quarter numbers of 156,245 per day.

Such results have already proven Ameritrade’s $2 billion purchase of TD Waterhouse. With 6.3 million accounts, the newly formed brokerage is expected to own 40 percent of the online trading market, which makes it one of the top contending online brokerages in the industry. While rising shares show investors are expecting more from online brokerage stocks – a sign of the healthy growth that the sector has been looking for.

Jerry Bartlett, CIO at TD Ameritrade, who is responsible for all of the technology at the firm – everything from information security and project delivery to operations and engineering – was the key figure involved in orchestrating the processes related to the magnitude of the systems integration. According to him, the largest challenge posed by legacy Ameritrade’s eighth major acquisition was integrating the 400 staff from legacy Ameritrade and the 400 staff from legacy TD Waterhouse.

The challenge of bringing together 800 unique individuals was only amplified by the fact that legacy Ameritrade’s presence stretched across the country. “That’s a lot of folks with a lot of different beliefs and approaches to the job so to try to get them entirely on the same page is the biggest challenge,” Bartlett says.

According to Bartlett, the technical side of the integration was fairly easy due to early planning, a pretty straightforward playbook and the fact that previous acquisition experience has enabled them to build things in such a manner as to minimize any rework. The most time-consuming part was building out the capabilities around independent advisors and long-term investors onto Ameritrade’s target platform. Bartlett estimates that over the course of 12 months, they delivered approximately 100 projects related to that functionality built or refined based on user feedback.

Virtually all of TD Ameritrade’s infrastructure and applications are Java J2EE based, so having mainstream technology and very few areas of proprietary technology was also helpful. “We’ve made tremendous strides over the last few years in implementing our service-oriented architecture so we’ve got a number of services that we can use across the board – across active trader, long term investor and independent advisor. We don’t have to reinvent the wheel each time. We’re very componentized. You build it once and provide it to the clients within a segment so there’s no rework involved there.”

Bartlett describes their planning: “When we begin due diligence on a deal, we develop hypotheses around which systems, how many people and which types of skill sets are likely to remain and then we go through a process around fact-based decision making and an exercise to understand the total cost of ownership for all of our options to essentially validate our hypotheses. So by the time a deal closes, we have our plan pretty much laid out and go into execution mode.”

The biggest bulk of work over the last few months has been filling in functionality gaps. “When we bring two sets of clients together to form a single experience for the entire sum total of our clients – approximately three million from each side – we make sure the legacy Ameritrade clients are gaining features and functionality that legacy Waterhouse clients had and vice versa. We are probably 99 percent complete with that work. Now we’re doing our final validation for the actual conversion of account data from the clearing firm that handled legacy Waterhouse over to legacy Ameritrade’s clearing.

“We have consolidated all of our call centers, we leveraged some money market sweep accounts with TD Bank as a partner, we’ve divested some of our non-core business such as capital markets and increased trading capacity – all preparing for the final integration steps coming up in the next few months,”
Bartlett says.

Key growth strategies

Along with tying together the last loose ends of the acquisition, TD Ameritrade is engaged in a number of key strategies for growing all of its customer segments – long-term investors, active traders and advisors. After gaining a great deal of expertise in the long-term investor and advisor space from legacy Waterhouse, the company plans to particularly focus on the long-term investor while continuing to make investments to provide additional offerings to clients across the board.

“One of the key strategies is to leverage a low-cost platform to provide robust technology at a low internal cost so that we can make additional investments in our branch network – providing new tools that are unique and gaining a better understanding of the needs of our clients both in the near term and long term, depending on what their financial and personal situations are,” Bartlett says. “So we’re very focused on a value proposition around the cost to our clients and the solutions we provide them.”

TD Ameritrade has found that by enhancing their tool and service offerings to the small and midsize advisors, they’ve also attracted their larger advisor client base. “We’ve typically focused on small to midsize advisors – that could be up to half a billion in assets under management – but as we’ve provided that population of advisors with additional tools and new services, we’ve found that those are the same tools and services that the large advisors are interested in,” Bartlett notes. “So as a result we’re actually making tremendous traction with large advisors with more than a billion dollars of assets under management.”

Bartlett also notes that their stance in the independent advisor space gives them a leg up on the competition. “Something that we’re extremely proud of is that we’re one of the few firms that are viewed as a true advocate for the independent advisor. We view our advocacy position as a differentiator. We don’t have a conflict of interest and we don’t compete with our advisors and that frankly gives us more traction than you could probably imagine.”

As legacy Ameritrade has been known for catering to the active trader, TD Ameritrade plans to continue to be a leader in that space. “One of the new strategies that we’re taking in 2007 is to make very targeted acquisitions of niche technology companies that allow us to either provide new tools or ways for active traders to access their systems in ways that they’d like to interact. For instance, we’ll provide APIs for active traders or other firms to place trades with if they’ve got their own systems in order to do that.”

Bartlett is also planning for active traders. “Active traders are a different breed: they’re very sophisticated, self-sufficient and they want choice. So we’re making some very targeted technology acquisitions that will provide what we think is the future in state-of-the-art tools.”

With numerous ongoing investments in the active trader space, TD Ameritrade is poised to remain at the forefront of active trading, an area where Bartlett sees lots of room for growth. “TD Ameritrade was a pioneer when we implemented a product we called trade triggers – which allows clients to set triggers around the market or particular industries or stocks, beyond just limit trading and trigger events. We also recently implemented a product called Strategy Desk, which is a very high-end, sophisticated rules-based trading and back-testing application that caters to the very sophisticated client, primarily active trading.”

After making a number of investments in the programmed trading side of business, the next step is to leverage the capabilities across the segments. “The next logical progression would be to bring that kind of capability to the less technically savvy but still independent-minded investor – to develop and provide some sort of pre-canned scenarios and models for traders that need a little bit more help in setting an investment approach. You may be savvy enough to take a Strategy Desk and know what kind of rules and scenarios you want to set up. On the other hand, you may be overwhelmed by the level of sophistication required and would like somebody to give you guidance or four or five options that you can choose. I think offering choices around investing scenarios is the next logical progression.”

As TD Ameritrade has boosted its offerings to active traders, it’s witnessed greater activity. In addition, the advanced tools are being leveraged across the customer groups. “We’ve seen that the more sophisticated and effective tools that you offer active traders, the more active the active traders become,” Bartlett says. “We then look for ways to leverage those tools for our long-term investors. So, we have Strategy Desk, a great tool for a sophisticated active trader but it’s not a great tool for the long-term investor. But let’s take some of the concepts in Strategy Desk for our programmed trading and make them more user-friendly for the person that wants a little bit more help. Everything we build we look to leverage in one of our other client segments to the fullest extent possible.”

The 360-degree view

Business intelligence remains an instrumental part of TD Ameritrade’s overall growth strategy in order to achieve a greater understanding of their clientele. Approximately 18 months ago, legacy Ameritrade began a major investment in an overall business intelligence strategy, which they continue to invest in to achieve a 360-degree view of all of their clients.

The 360-degree view begins with extracting their clients from pragmatic categories. “The fact is we know that there aren’t real buckets of clients – clients make a progression through perhaps an active trading phase before they start thinking about their long-term investments. Then they’re sort of in a transition phase where they might have multiple accounts and may have one foot in each of those arenas. At some point, many clients decide they want additional help for example from an independent advisor; so our focus in collecting data and the analysis we do is really not just about their investing habits but trying to tie that to lifestyle habits.”

TD Ameritrade is focused on understanding each client’s lifecycle and not simply their financial status. “For instance, if we know in ten years a client is going to have some children that are preparing to go to college, then we want to be in a position to offer them choices now about preparing for college,” Bartlett says. “It’s really about understanding the entire lifecycle of our clients – financial and personal – to be able to proactively offer choices and not to pigeonhole them with particular solutions. That’s something that we think will not only help our clients but will create even a greater sense of loyalty to the firm because it shows that we’re concerned and we’re offering choices.”

Along with understanding their clients better, the company is also dutifully focused on enhancing security for their clients. Having been hit last year by stock-trading schemes that required compensation for client losses, they are continually learning where their biggest weakness lies. Among significant investments in security, client education still ranks as their number one concern.

To an extent, security is only as dependable as the end user, which is why TD Ameritrade promotes secure behavior and in exchange offers a favorable asset protection guarantee. “We have in place robust encryption, robust intrusion detection and advanced approach for user authentication,” Bartlett says. “But our biggest concern is that our clients’ computers are not compromised by malware, thus allowing accounts to be compromised. We offer a very generous asset protection guarantee but in exchange for that, we ask our clients to use tools to find and disable malware and to be careful with their passwords and user IDs.”

Bartlett believes the most common security failing within the financial services industry lies in protecting the clients’ computers, which begins with proper education. “We can’t necessarily require clients to use a particular product so education is our biggest challenge. It’s not because our clients are not sophisticated – because indeed many are very technically savvy – it’s that there are organizations that are very sophisticated that are coming up with new ways to compromise computers every single day.”

Due to the growing sophistication of fraudsters, TD Ameritrade is also involved in behavioral analysis work to identify susceptible or particularly vulnerable clients that participate in risky behavior. “It’s virtually impossible to keep the bad guys from getting access to your clients’ computers but through behavior analysis we can raise flags in real-time that this may or may not be particular client based on past history. We’re seeing positive results and we think that’s where the future of our investment is likely to be.”