New service agreement at TD Ameritrade causes flap

SAN FRANCISCO — Amid protest from its advisers that they are being asked to assume too much liability, TD Ameritrade Institutional is going back to the drawing board with its new service agreement.
The Jersey City, N.J.-based custodian will collaborate with advisers to draft a new agreement, a process that is likely to take months, said company spokeswoman Diana DeSocio.
The move comes after TD Ameritrade Institutional found itself deluged by telephone calls from advisers who were upset by the wording and the timing of the new agreement, which was supposed to have gone into effect April 30.
In circulating the new agreement, TD Ameritrade Institutional was attempting to put all of its advisers under one standard contract. Currently, some advisers are operating under an agreement from Ameritrade Holding Corp. and the remainder under one from TD Waterhouse Group Inc.
On April 25, Thomas A. Nally, managing director of brokerage services at TD Ameritrade Institutional, informed the company’s advisers that the April 30 deadline has been extended indefinitely.
The general complaint among advisers was that the agreement shifted too much of the corporation’s liability onto their shoulders.
“They’re supposed to help with our back offices, but now we’re helping with theirs,” said Gerald Levin, president of GBL Asset Management Inc., in Huntingdon Valley, Pa. “We’re accepting some of their legal liability.”
Agreements overstep
Bedda D’Angelo, principal of Durham, N.C.-based Fiduciary Solutions, agreed with that assessment.
“The proposed service agreements contain language that often is used appropriately in agreements with captive insurance agents and independent brokers — who are statutory employees of the company,” she wrote in an e-mail.
Another adviser put it more bluntly.
“I don’t like being treated like a Series 7 guy,” said the adviser who asked to remain anonymous.
The harsh response surprised TD Ameritrade officials.
The spirit of the agreement did not differ much from previous agreements, Mr. Nally said.
“Here’s the problem: We know what we want to convey — but advisers might view it differently,” he said.
Indeed, many advisers doubt that TD Ameritrade had any malicious intent.
“I think [TD Ameritrade] stepped on a hornet’s nest,” said Scott Horsburgh, president of Seger-Elvekrog Inc. in Bloomfield Hills, Mich., which has $250 million in assets under management. Maybe so. But advisers can expect more friction with their broker-dealers and custodians over liability issues, said Mark Tibergien, managing partner at Moss Adams LLP of Seattle.
“For a period of time, I think there’s going to be a lot of tension,” he said. “Everybody is trying to offload or share risk” out of concern for a perceived sense of heightened liability in the industry. Nancy Lininger, principal compliance consultant for The Consortium in Camarillo, Calif., agreed that the regulatory climate must have played a role in the tenor of TD Ameritrade’s service agreement.
Advisers resented the imposition of the April 30 deadline and that the contract took the form of a no-action letter, which meant it automatically took effect unless an adviser raised a protest.
The deadline was imposed March 29. The salt in the wound was that the letter was sent out at a time when tax deadlines preoccupied many advisers, they said. “This is the way things are on Wall Street,” said one adviser who asked not to be named. “If you don’t like this, you can leave.”
The larger custodians would not speak about the terms of their agreements, nor would they assure advisers that they could expect the status quo.
“We’re always looking at the potential to make changes where it’s appropriate, and it’s based on the business and regulatory environment,” said Steve Austin, spokesman for Fidelity Investments of Boston.
Pershing LLC of Jersey City, N.J., declined to comment, said Mike Geller, spokesman. Schwab Institutional of San Francisco is unlikely to alter its agreements, unless a new rule mandates change, according to Lindsay Tiles, spokeswoman for Schwab.
Schwab last changed all of its agreements in 2004, and the company did not experience a backlash similar to what occurred at TD Ameritrade, she added. But the backlash is a temporary setback that has cost the company neither assets nor goodwill, Mr. Nally said.
Two of the flash points are blamed on semantic issues, he said. Advisers recoiled from language telling them they could not use the TD Ameritrade name without permission, and they would have to comply with the USA Patriot Act.
The firm intended to say that advisers could not represent themselves as employees of TD Ameritrade, and they would have to comply with the Patriot Act if the law required it in the future, he said.
But advisers reacted most strongly against a contractual provision that gives TD Ameritrade the right to go after their personal assets to offset liabilities incurred by the advisers.
But it is unlikely the firm will bend much on this provision, Mr. Nally said. “We’ll try to clarify it,” he said. “I know other custodians have this [right of offset] in their [service] agreements.”