A message to you all about a recent letter from TD Ameritrade concerning a “Standing Letter of Authorization”.
Most of you have received a letter from TD Ameritrade reminding you of a “Standing Letter of Authorization”. I thought this would be a good time to remind you how this TD/Anselme Capital duo works for you.
TD Ameritrade is the custodian of your assets. This means that they carry out transfers between authorized accounts, they hold your cash, give you access to stock bond and fund markets, hold your securities, collect interests and dividends for you, they keep track of all transactions and they provide you with monthly statements and annual tax documents about your accounts together with access to their website displaying your assets at any time. It is their responsibility as custodian to remind you that you signed a Standing Letter of Authorization allowing Anselme Capital to transfer at anytime between your TD account and the bank account you have authorized.
Anselme Capital (AC) has limited power of attorney over your accounts at TD Ameritrade. This means that AC has the right to place trades in your accounts. AC also has the right to extract your management fees from your accounts provided that you received a receipt before each extraction. If you signed a standing letter of authorization AC also has the ability to initiate transfers between your TD account and your bank account (we only do this at your request). As it invests your assets, AC is bound by fiduciary duty toward you. Our responsibility is to figure out your financial needs and to deploy a portfolio in your accounts that matches your need. AC has committed to do what is in your best interest before it’s own, and to disclose conflicts of interest to you if they arise.
You pay TD by paying for trades. The cost of these trades (currently $6.95 for an ETF, $9.99 for a Dimensional fund) is reported to you in every trade transaction. Since Anselme Capital invests passively and with relatively simple portfolios, trades are rare. We estimate that a client spends about $150 a year on trades, regardless of the size of the account. You may also pay TD in the form of an operating fee if your account uses their money market. Since our clients tend to operate fully invested, the amount spent in money market operating cost is minuscule. You may also pay TD if you have a margin loan, most of our clients operate without margin loan.
Anselme Capital only gets paid by you, the client. We must show you a receipt before we can collect our fee from your account. We receive no money from TD Ameritrade, Dimensional Funds or any other fund manager. We also do not pay TD or any fund manager. TD and fund managers do invite us to their conferences and they do treat us for meals usually.
This system of Fiduciary Adviser/Custodian has several specific advantages
- TD and Anselme Capital police each other in defense of your interest. For example, in this ‘Standing Letter of Authorization’, TD is making sure you do not forget you allowed Anselme Capital to carry out these transfers between your accounts. If AC extracts too high of a fee, TD will alert you. Similarly, AC is responsible for checking that the trading costs and service level of TD are reasonable.
- You receive unbiased advice serving your interest first. Because the funds we use to build our portfolios do not pay us, only their investment characteristics (and cost) matter to us. Because we are not paid by trades, we have no incentive to churn your account.
- Your overall investment costs are reduced. Making sure that your overall costs of investing are low is our fiduciary duty.
Having two financial institutions under contract to serve your financial interest might seems like a strange complication at first. This combination really became popular in the 90’s when the cost of trading securities dramatically fell. Before then investment advice was typically bundled with market access, the investor had a retail account brokerage and the broker was the one giving advice. High trading costs were considered the cost of advice to the investor. As internet trading grew a few institutional brokers (TD, Schwab and Fidelity) developed super cheap software platforms that let Registered Investment Advisers provide independent fiduciary advice for a fee on their software. This Fiduciary Adviser-custodian tandem has taken capital away from the old broker model every year since the mid 90’s. In a couple of years this tandem business model will manage more money than the traditional brokers themselves.
You may think that this difference with the old model is just theoretical. I can tell you that it is not. Whenever Alex and I review the costs and content of a traditional brokerage account we always see the same thing; high costs and self interested advice, funds that are chosen for how much they pay the broker. We also tend to see poor portfolio structure in terms of not placing tax inefficient investments in non taxable accounts, a bond ratio that is usually too high, or the addition of municipal bonds for a client who gains no advantage from them. There is no reason for an investor to invest within the old broker model, but it’s important that you understand why, and question the investments you have. Even those that we provide, we are always happy to provide you with the answer.
