TCS Daily

Omaha, Capital of Investor Nation

By Dominic Basulto - July 7, 2005 12:00 AM

More Americans than ever before now have the opportunity to own a stake in the future of their country, and much of this can be attributed to the dynamism and innovation of the online brokerage industry over the past 10 years. Companies like Ameritrade have enabled millions of individual Americans -- even those with modest bank balances -- to become shareholders and wealth owners. With its recently announced $3 billion acquisition of the U.S. brokerage business of TD Waterhouse, Ameritrade is taking the next step in transforming America into a nation of citizen investors.

The combined entity, known as TD Ameritrade, will become the #1 player in the online brokerage industry, managing more than 5.9 million client accounts and $220 billion in client assets, and handling more than 239,000 client trades per day. Interestingly, the corporate home of Ameritrade is not New York City, Boston or San Francisco -- it is Omaha, which also just happens to be the home of one of America's most-loved investment gurus, Warren Buffett. As America truly becomes a nation of citizen investors, it is only fitting that the capital of this investor nation should be located in the heartland of America.

One of the online brokerage industry's primary contributions to the democratization of the investment process over the past 10 years was its championing of a simplified, do-it-yourself investment approach that was designed to make trading equities online as simple as possible for the individual investor. It is now possible to buy small ownership stakes in companies cheaply and easily, without the need of an intermediary. For Ameritrade, the cornerstone of this strategy recently has been the $10.99 Internet equity trade. By offering one low price for all trades (including stop and limit orders), Ameritrade basically said: "Trade as many shares as you like, it doesn't matter if there's $2,000 or $2 million in your account." The strategy worked -- at a time when other, higher-priced online brokerages are reporting net account losses, Ameritrade is continuing to add client accounts.

By adding the extra heft of the U.S. brokerage business of TD Waterhouse, Ameritrade will be able to consolidate its position within the online brokerage industry and further democratize the investment process for the individual investor. The importance of this can not be overestimated: with citizens becoming investors, there is a greater opportunity to reduce the perceived wealth gap between rich and poor and to improve the overall quality of American life. Once TD Ameritrade squeezes out costs and takes advantage of its larger scale, it will be able to take on additional functions of banks and investment advisors. This is an important fact: TD Ameritrade is not only serving the active trader, but is re-orienting to the long-term investor. With the nationwide network of 143 branches and 2.3 million accounts that it will inherit from TD Waterhouse, Ameritrade will be able to create a more robust platform for gathering client assets and introduce more tools, products and services for the long-term investor.

Usually, the prospect of a blockbuster M&A deal creating the #1 player within any industry would raise concerns about competition and diversity. Consolidation within the online brokerage industry, though, has been going on for some time now, as firms struggle to adjust to lower trading volumes and overcapacity. There is no doubt that a bulked up TD Ameritrade will have greater ability to dictate industry pricing. However, considering the price war between rival brokerage firms such as Charles Schwab, Fidelity, E*Trade over the past six months, it is unlikely that Ameritrade -- even if it wanted to -- could put upward pressure on pricing. Consider, too, that Ameritrade spurned an earlier takeover offer from E*Trade in May that was worth anywhere from $5 billion to $6 billion. That deal would have given the combined E*Trade/Ameritrade entity much greater ability to raise commissions, especially for active traders and investors with small account balances.

Ameritrade has already been a key player in democratizing the online investing process and empowering the individual investor to learn about the financial markets and take a stake in the economic future of the country. As the U.S. becomes an investor nation, where every citizen owns a stake in the economic future of the country through the ownership of stocks and bonds, it is likely that TD Ameritrade will spur the kinds of changes needed to create a true ownership society, such as more tools to help investors manage and grow their net worth. The time of a true ownership society may still be far off, but it is obvious that discount online brokerage firms are becoming increasingly important providers of financial services to a growing number of Americans. Looking back, who would have guessed 25 years ago that the New York Stock Exchange would be considered a dinosaur, that more than half of all American adults would own stocks and bonds, and that millions of Americans would be trading stocks via the Internet from the comfort of their own homes thanks, in part, to the efforts of a visionary company based in Omaha?

The author is a TCS contributing writer who concentrates on business, technology and venture capital markets.


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