How Does TD Ameritrade Make Money?

TD Ameritrade is a broker and online trading platform for common and preferred stocks, forex, options, cryptocurrency, mutual funds, and futures contracts. It also offers a range of cash management services. The investing platform gains commissions by selling various type of assets. With over $1 trillion in assets, TD Ameritrade also makes a significant amount of money from funds sitting idle in customer accounts. Payment for order flow (PFOF) is compensation TD Ameritrade earns for facilitating the execution of trades.

Aspect	Description
Commission Fees	TD Ameritrade earns a significant portion of its revenue through commission fees charged to clients for executing trades. Clients pay fees for buying and selling stocks, options, exchange-traded funds (ETFs), mutual funds, and other financial instruments. These fees can vary depending on the type of trade, the asset class, and the volume of trading activity. While the industry has seen a trend toward commission-free trading, TD Ameritrade may still charge commissions for certain trades.
Spread and Margin Interest	TD Ameritrade earns revenue through spread and margin interest. When clients trade on margin (borrowing funds to leverage their investments) or hold cash balances in their accounts, TD Ameritrade can earn interest income by investing those funds in short-term securities or lending them to other financial institutions. The difference between the interest earned and the interest paid to clients represents a source of income for the company.
Asset Management Fees	TD Ameritrade offers a range of asset management services, including robo-advisory platforms and professionally managed portfolios. Clients who opt for these services pay asset management fees based on a percentage of their assets under management (AUM). These fees can vary depending on the level of service and the AUM. TD Ameritrade may also offer commission-free ETFs through its platforms, earning fees from ETF providers.
Subscription Services	TD Ameritrade provides clients with access to various subscription services that offer enhanced tools, research, and educational content. These services often come with a monthly or annual fee. Examples include premium trading platforms, advanced market data, and proprietary research reports. Revenue is generated from subscription fees paid by clients who opt for these premium services.
Corporate Services	TD Ameritrade offers corporate services to businesses and institutions, including retirement plans, stock plan administration, and cash management solutions. Revenue is generated by providing these services, often through service fees and asset-based fees. These services cater to the needs of corporate clients and organizations.
Interest Rate Spread	TD Ameritrade may earn revenue through the interest rate spread. By maintaining deposits and cash balances in client accounts, TD Ameritrade can invest these funds in interest-bearing assets such as government bonds or other financial instruments. The interest income generated from these investments contributes to the company’s overall revenue.
Challenges and Competition	TD Ameritrade faces challenges related to competition in the brokerage and investment services industry. The industry is highly competitive, with several brokerage firms vying for clients. Staying competitive in terms of trading fees, technological innovation, and customer support is essential for sustained growth. Meeting regulatory requirements and ensuring data security are also ongoing concerns.
Future Growth Strategies	TD Ameritrade’s future growth strategies may involve: – Digital Innovation: Continuing to invest in and enhance its online trading platforms and tools. – Client Education: Offering more educational resources to help clients make informed investment decisions. – Diversification: Expanding its range of financial products and services to cater to a broader client base.

Table of Contents

History of TD Ameritrade

TD Ameritrade was founded in 1971 by now billionaire philanthropist John Joseph Ricketts. During the 1970s, the Securities and Exchange Commission eliminated the practice of fixed brokerage commissions. TD Ameritrade – then operating as Omaha Securities – was one of the first major brokerage firms to break the mold and offer discounted commissions.

The firm would continue its pioneering culture in the following decades. It was the first to offer touch-tone phone trading in 1988. Six years later, it was involved in executing the first online trade after acquiring K. Aufhauser & Co. TD Ameritrade then helped grow and improve online trading for self-directed investors in the late 1990s. It started to offer features modern investors take for granted, including online options order entry, extended trading hours, and electronic, email-based trade confirmations.

In the modern era, TD Ameritrade continues to be a beacon of success. It now manages over 11 million client accounts representing more than $1 trillion in assets.

TD Ameritrade revenue generation

As the provider of multiple financial services, TD Ameritrade has an extremely diverse revenue generation model. This is particularly impressive considering the company offers a commission-free investment option with no platform fees, data fees, or trade minimums.

Here is a very general look at some of the main sources of revenue.

Investment platform

Stocks – the online trading of stocks is free, while trades made via a phone system are $5 and broker-assisted trades are $25.
Exchange-traded funds (ETFs) – as above, with commission-free ETFs also being free to trade.
Options – online options trading is subject to a 65 cent fee per contract. Trades made via the interactive phone system are $5 plus 65 cents per contract, while the broker-assisted option is available for $25 plus 65 cents per contract.
Futures – futures trading is available for $2.25 per contract. Exchange and regulatory fees are also applicable.
Forex – TD Ameritrade offers Forex currency pair trading in 10,000 unit increments. While there is no commission, the cost of the trade depends on the bid/ask spread.

Interest

With over $1 trillion in assets, TD Ameritrade also makes a significant amount of money from funds sitting idle in customer accounts.

It does this by lending it out to other financial institutions and then making a profit on the net interest margin. This occurs when the amount of interest collected from borrowers is more than the amount of interest paid out to consumers who have funds in a checking account.

Recent figures show that 28% of company revenue comes from net interest margin.

Cash management

A cash management account allows users to manage their savings, investment, and retirement funds from a single interface.

Since TD Ameritrade is not a bank, it has partnered with certified institutions such as TD Bank to hold customers’ funds on its behalf.

Here, the company earns money through the net interest margin we mentioned in the previous section. Through its relationship with TD Bank, it also earns affiliate income for referring business to the bank. Depending on the account selected, customers may also have to pay a monthly maintenance fee. This fee may or may not be shared with TD Ameritrade.

Payment for order flow

Payment for order flow (PFOF) is compensation TD Ameritrade earns for facilitating the execution of trades.

Essentially, the company earns a referral fee for directing order flow to a specific market maker. This fee is a mere fraction of 1%, but revenue multiplies quickly as millions of trades may be facilitated daily.

Value Proposition:

Comprehensive Investment Solutions: TD Ameritrade offers a wide range of investment products and services, including stocks, bonds, mutual funds, ETFs, options, futures, and forex trading. Whether clients are new to investing or experienced traders, TD Ameritrade provides comprehensive solutions to meet their financial goals and investment preferences.
Advanced Trading Tools and Technology: TD Ameritrade provides clients with advanced trading platforms and tools that empower them to make informed investment decisions. From thinkorswim, a powerful trading platform with advanced charting and analysis tools, to the TD Ameritrade Mobile App, clients have access to cutting-edge technology for trading and portfolio management.
Educational Resources and Support: TD Ameritrade offers extensive educational resources and support to help clients learn about investing, trading strategies, market trends, and retirement planning. This includes webinars, articles, videos, in-person events, and a community of knowledgeable investors who share insights and expertise.
Exceptional Customer Service: TD Ameritrade is committed to providing exceptional customer service and support to its clients. Whether clients have questions about their accounts, need assistance with trading, or require technical support, TD Ameritrade’s team of knowledgeable professionals is available to help through multiple channels, including phone, email, and live chat.

Marketing Strategy:

Digital Advertising: TD Ameritrade utilizes digital advertising channels, including search engine marketing (SEM), display advertising, and social media advertising, to reach potential clients and promote its investment products and services. Digital advertising allows TD Ameritrade to target specific demographics and interests, driving traffic to its website and mobile app.
Content Marketing: TD Ameritrade produces and distributes educational content on investing, trading strategies, market analysis, and financial planning through various channels, including its website, blog, social media, and email newsletters. By providing valuable and informative content, TD Ameritrade attracts and engages clients while positioning itself as a trusted authority in the industry.
Partnerships and Sponsorships: TD Ameritrade partners with financial media outlets, influencers, and industry organizations to expand its reach and credibility. This may include sponsoring events, collaborating on content initiatives, or participating in industry conferences and expos. Partnerships and sponsorships help TD Ameritrade reach new audiences and enhance its brand visibility.
Referral Programs: TD Ameritrade offers referral programs and incentives to existing clients who refer new clients to the platform. Referral programs encourage word-of-mouth marketing and incentivize clients to share their positive experiences with friends, family, and colleagues.

Distribution Channels:

Online Platform: The primary distribution channel for TD Ameritrade is its online platform, which includes its website, trading platforms, and mobile app. Clients can access investment products, research tools, trading platforms, account management features, and educational resources through TD Ameritrade’s online platform, providing a convenient and accessible experience.
Branch Offices: TD Ameritrade operates a network of branch offices across the United States, where clients can receive in-person assistance, attend educational workshops, and meet with financial consultants. Branch offices serve as physical locations for client support, account services, and personalized guidance on investing and retirement planning.
Call Centers: TD Ameritrade operates call centers staffed by customer service representatives and licensed professionals who provide assistance with account inquiries, trading support, technical issues, and general inquiries. Clients can contact TD Ameritrade’s call centers via phone, email, or live chat for personalized assistance and support.
Financial Advisors: TD Ameritrade offers access to financial advisors and investment consultants who provide personalized advice, portfolio management services, and financial planning guidance to clients. Financial advisors work with clients to develop customized investment strategies, retirement plans, and wealth management solutions tailored to their individual goals and risk tolerance.

Key takeaways:

TD Ameritrade is an established online investment platform and a broker. It was founded by John Joseph Ricketts in 1971 and is seen as a pioneer in providing investment services for individuals. It was the first to offer commission-free trading and was involved in the first online trade in 1994.
TD Ameritrade operates on a commission-free trading model. Therefore, it generates revenue through phone or broker-assisted trades in various types of securities. It also earns over a quarter of total revenue in net interest margin.
TD Ameritrade offers a checking account in partnership with banks such as TD Bank where it earns affiliate income for referring businesses. Lastly, the company generates revenue via payment for order flow.

Key Highlights:

Overview: TD Ameritrade is a leading broker and online trading platform offering a wide range of investment services, including common and preferred stocks, forex, options, cryptocurrency, mutual funds, futures contracts, and cash management solutions. With over $1 trillion in assets, TD Ameritrade serves millions of clients globally, providing them with innovative tools, educational resources, and personalized support to help them achieve their financial goals.
Commission Fees: TD Ameritrade earns revenue through commission fees charged to clients for executing trades. Clients pay fees for buying and selling stocks, options, ETFs, mutual funds, and other financial instruments. While the industry has shifted towards commission-free trading, TD Ameritrade may still charge commissions for certain trades, phone or broker-assisted trades, and other specialized services.
Spread and Margin Interest: TD Ameritrade generates revenue through spread and margin interest. When clients trade on margin or hold cash balances in their accounts, TD Ameritrade earns interest income by investing those funds or lending them to other financial institutions. The difference between the interest earned and paid represents a source of income for the company.
Asset Management Fees: TD Ameritrade offers asset management services, including robo-advisory platforms and managed portfolios, where clients pay asset management fees based on a percentage of their assets under management. Additionally, TD Ameritrade earns fees from ETF providers through commission-free ETF offerings on its platforms.
Subscription Services: TD Ameritrade provides clients with access to premium subscription services offering enhanced tools, research, and educational content for a monthly or annual fee. These services cater to active traders and investors seeking advanced features and insights to inform their investment decisions.
Corporate Services: TD Ameritrade offers corporate services such as retirement plans, stock plan administration, and cash management solutions to businesses and institutions. Revenue is generated through service fees and asset-based fees associated with providing these services to corporate clients.
Interest Rate Spread: TD Ameritrade earns revenue through the interest rate spread by investing client deposits and cash balances in interest-bearing assets, such as government bonds or short-term securities. The interest income generated contributes to the company’s overall revenue.
Challenges and Competition: TD Ameritrade faces challenges related to competition in the brokerage and investment services industry. Staying competitive in terms of trading fees, technological innovation, and customer support is essential for sustained growth. Meeting regulatory requirements and ensuring data security are ongoing concerns.
Future Growth Strategies: TD Ameritrade’s future growth strategies may involve digital innovation, client education, and diversification of financial products and services to cater to a broader client base.