Tim Hockey and Tom Nally Discuss Robo Advisors

spectacular ocean front. As lovely a location for a conference as you'll find. I had the privilege of interviewing Tim Hockey. He is the CEO and president of td A merrit Trade, a company that serves both individual investors and independent r i A s. They have total client assets of about one point three trillion dollars as of the end of the second quarter. They are the custodian of choice for a number of r A r i A s UH.

They are one of my two custodians we work with t D and Schwab at r W M and UM. The other person I interviewed was Tom Nallly. He is the president of td A Merritrade institutional which provides custody and brokerage services to more than seven thousand UH independent r i A s. That's about six hundred and fifty billion dollars under custody. This is very much an inside

baseball conversation. If you are an r i A, if you're interested in the investment management or financial planning business, then this really is uh inside baseball stuff that is must listen. So, with no further ado, my interview with Tim Hockey and Tom Nally. So the real brief introduction.

When I was doing the homework for this, t D manages or custodies one point three trillion in total client assets, eight hundred and sixty thousand average clients trades per day UM, generating about a billion and a half revenues a year. That is a really substantial set of data UM, and it says a lot about what this organization is about. So, so let's start with some questions, beginning with Tim, So, what does it mean to be a CEO of such

an enormous organization? How do these challenges differ from other roles you've played within the company. Well, I was talking to the advisor panel this morning and I've said it's now been three and a half years since UH, since I took on the job as CEO UH and having come from the TD Bank in Canada. It's very dramatic difference. UM. The dramatic difference is you know the phrase the buck stops here. You feel that in spades UH in in this job and this rule in particular, an enormous sense

of responsibility UH to the all of the constituents. Doesn't matter whether it's your associates, or your clients, or your your shareholders or frankly the communities that that all of our people work in. It's just that sort of UM. Don't want to let people down. I guess is the UH is the largest issue, the biggest shift from the job. If you graduate into this rule and to see role and get promoted in is is literally the time horizon.

Your time arizing, by definition has to shift out. UM. If you want a geek out on management theory for a second, the basic premises, organizational hierarchies, levels of an organization six, seven, eight, nine, whatever it is, UM, they all depend on what sort of time arising you have. So if you're a if you're a bank teller, you know you've got a time arising in one day, right, it's your shift. If you are processing a piece of paper as an administrator, it's a one day time arising.

If you're an entry level supervisor that second level, then it's a very short period of time, probably a week, maybe a couple of weeks. As you go up your organization, your time arising apps to shift out. So if you go from Tom's level six seven levels in your organization, you can have a time arising up saying how do I transform the institutional business with five to ten years

of time rising? And then at the CEO of the firm level you should be running from ten to twenty years and that that means you've got to try and keep all your balls moving to be able to um, you know, hit those objectives a long way out with a lot of variabilities. So anyway, enough geeking out. But that's that's the biggest difference in this job. So let me pull it back from the geek side. When when you find out um, you're going to be CEO, you say to yourself, I don't think people really know who

I am. Maybe I should write a bo look and tell a little bit about myself, explain the thought process there. Uh. Well, thankfully it wasn't a book that would have taken too long. But after being at a TD for thirty two years and pretty much knowing everybody knowing me, when I came to TD and merit right, I realized it was going to be an unknown quantity. And anytime you have a new boss, what does everybody think? They say, all right, well,

what's he or she like? You know, what's their management style? What do they value? And we generally with a new boss, will spend literally months or years trying to figure that person out. And so what I did when I got here was to recognize that that was what you know, Tom and the rest of the team was thinking about. And I actually spent some time on a very rainy weekend at my place in South Carolina and pen something I called it was the User's Manual to Tim or

Users Guide to Tim. Uh and it just basically it was an open book. I said, here's what I what I think about management, Here's what I believe, here's you know, everything you would want to know about me, and and you know, taking glass of red wine and and read it and hopefully it'll be helpful, and then hold me accountable to it. Uh. And that's that's the that's the trick. And so then I sent it out to my leadership team and they then said, well, can we send it

to our leadership team? And they said, and we send it to our leadership team. And that was the theory behind it. Very very good practice to go through. I would highly recommended it, not just because I think it's helpful for as a new leader in an organization. H I actually went through with my wife and my two boys, and they're the harshest critic and so they read the first draft in the second draft and they said, yeah,

that's that's not right, so change that, fix that. Um. But it does force you to be crystal clear and your expectations of yourself and and live up to those

with your team. And I could say it was incredibly helpful for somebody who was trying to understand, Okay, who is this guy that just you know has shown up on the scene that based upon a relationship with t D kind of have some level of familiarity with him because of his previous role and you get to see him once a year and this big giant convention speak. But then to actually see this and understand who he is as a person. It just gives you a nice roadmap to to figure out, Okay, how do I interact

with him? And it was really incredibly helpful. So Tom, let's let's talk a little bit um about you. You've helped rant t D up to seven thousand independent r I a s tusting in with two D America Merritrade Internet Institutional Um. That's a giant success by any measure. What was that process like and where did you encounter major road roadblocks? I would say it was a long slog.

We've been at this for you know, more than two decades now, and uh I think it all started with just having a really keen focus on understanding, you know, what the needs of the advisor actually are and trying to craft a value proposition that delivers on those needs and make sure it was able to evolve over time as those needs change, as the market change, and so on and so forth. And it's been uh an incredible,

you know, right. I mean, we've been trying to take advantage of this massive secular trend towards the independent are a model that is we don't think going to slow down anytime soon. It's great for our industry. It's it's great for UH financial services in general. You know, it's amazing when you see the beauty of just putting the client first, what can happen, and that goes for us,

it goes for you. It's been a wonderful road and you know, we feel like we're just getting some momentum here as people become more aware of what it is are as actually do and how it's doing the right thing for for clients, which is fantastic. So what were the big surprises on the road to seven thousand and and beyond. Well, I think just the change that's taken place in our space. You know how advisors businesses have

have evolved in change. When I first started, most are A firms were portfolio allocation shops, and then they started to become comprehensive wealth management firms, adding on more and more services. And today basically, you know, all of you are being asked by your clients to be all things, you know, give me advice on all things that have to do with money in my life, and think about that.

I mean, it's basically everything. So we're trying to keep up with the evolution of what your clients are demanding from you and enable you to deliver great client experience, you know, at scale, high quality. So it's it's it's been amazing just to watch that happen and see how the industry has evolved. The other thing is just the shift and the trend towards are as versus the wire houses.

You know, in the last ten years, wire houses have lost about eleven points of market share and the ra A channel has captured about eight eight points of that, which is which is spectacular. And the more and more consumers get smarter about the relationships that they enter into,

you know, that will continue to change. The more advisors recognize that I can do this better on my own rather than being in a captive environment, will continue to see advisors shift and and go independent and join existing firms. We've seen an enormous amount of capital flow in So it's it's it's been an amazing, amazing ride. So, Tim, you have to balance your your attention on two different groups. On the one hand, you have all of your R

I A clients. On the other hand, there are shareholders and there are owners of TV that UM need to be satisfied. How do you balance the two of those where's the focus and do you ever, um find the place where it's sometimes challenging to strike the exact right tone.

I don't think it's actually a trade off between the two. Um. You know, my general philosophy and I think I wrote it down down that book was you take care of your associates, they take care of your clients, and the clients then take care of the shareholders in that sort

of sequence. UM. Actually I can I can draw a little bit on your last question of Tom to sort of make the point everybody in this room is participated in this extraordinary shift to the r A channel of the last ten years, said this morning, it's it's tripled in size and um in ten years. But Tom's business he started stuffing envelopes in institutional business, you know how many years ago? And now was it twenty five years? I wasn't gonna out it, but okay, but it was

twenty five years ago. He started in the institutional business for for T d A. And we've grown six times. And so you have that sort of focus on doing right by your clients and helping them be successful, and the shareholder gets massively rewarded. And UM, I also you know shared this story with the panel this morning. I thought it was a great one because we actually went and did a long term view of our of our

performance as a company. Here we are as a as a wealth management firm, we should take a look at our own performance and say how have we done? So here's here's other MathWorks and I think it's a fun story. We I pot as a company in adjusted price a buck fifty, so here we are now at fifty and change. So there were forty six hundred public companies back in those h in interveting years. Twenty four hundred of those forty six hundred, uh were bought, so they consolidated into

the others. Eleven hundred of those hundred companies basically, UM, we're delisted and so they're got so about eleven hundred companies left. We're still one of the eleven hundred. Then if you say, all right, what was the size of those companies? Of those eleven hundred, there was about six hundred that had this similar market cap to we did when we I POD about two hundred million dollar market cap.

Now we're thirty billion. So out of those six hundred companies that remain, UM, we rank ordered them in terms of total shareholder return, and we are number eleven out of six hundred over those twenty two years since our I p O. No big surprises to uh, who's number one Apple? But I think that's long term success and performance as a company going back from the I p O days, comes from being a combination of the right things.

Great leadership. You know, I've only been here three years, but you know, guys like Tom twenty five years and Fred and Joe and our founder UM riding a wave of success focusing on your clients and the value you can deliver, and the shareholder gets intensely rewarded for that. So this has just been a great right for us. So Tom, let's talk a little bit about some of the elements that have led to this success, starting with technology.

If there's a question I hear from advisors more than anything else, it's how can I be cutting edge UH and provide the technology I need to run my business and my clients want without getting distracted by every new shiny object that comes along. Yeah, I mean it's a great question. I think you know. Our view is technology is the great enabler, right. It enables you to deliver more services to your clients and you know, have a more robust value proposition. And I think you almost need

to break that into two different things, right. The first thing is there's probably a lot that are mature technologies that are out there that you can take advantage of now in the immediate term to improve your efficiency your client experience. Many times that's you know, one and the

same and work on implementation. On the second half of it, you really need to keep your ear to the tracks around what are consumer trends, What are you know, the expectations of the consumer, not just in financial services, but in just the way they interact in their life. You know, with Amazon, Google, you know, Apple, a lot of the top companies, to see how those trends are evolving, and then work with the firm like ours to give us insights into what it is that you need what you need.

What we're seeing is a lot of firms getting pushed into adding these additional services. So how can we partner together to deliver your you technology you know at scale l that you might not be able to do on your own. So I think there's a commodation of factors that you need to focus on there. But technology really is the biggest opportunity out there because if you think about everything in your business is pretty much going to

be automated, which is a good thing. Technology is a tool for all of us to utilize across every facet of of whether it's trading, rebalancing, you know, risk management, CRM, portfolio, you know, reporting, the whole nine yards, and that just frees you up to spend more time deepening relationships with your clients, which is what clients really care about. You know, we have one advisor to say to me one time, and it really stuck with me, and I continue to

bring this up. Nobody ever walks in the offense says I want to beat the SMP by five points. They walk in and say, am I gonna be okay? And technology enables you to have all of those tactical things done in an automated fashion, so you can spend the time really getting to understand what are the hope stream spheres of those clients and make sure that you're you're meeting those needs and and delivering on what they're most

concerned about. So, so you mentioned rebalancing is a technology, how do you decide internally, hey, we can build something that will push a button and automatically rebalance and do some tax loss harvesting, or oh maybe there's a company out there that might be much more mature and further along and it will be faster and more efficient to buy it like I Rebound. How does that decision build your by be made and what sort of elements are you thinking about? See from our perspective when we go

through that you know, uh equation. I mean, we really are looking if we're gonna make an acquisition where there's got to be white space where we can be an industry leader and it fits within our core capabilities of the services that we type, we try and deliver and get strategic advantage like with I Rebound. Now, I rebould has you know, probably more than fifty market share in

that rebalancing space, so there was an opportunity there. If we don't think that we can can carve that out for ourselves, we would rather have an open up which our technology platform is very open architecture, you can plug in many different types of systems. Um we'd rather partner with industry leaders and then work to give advisors advisors guidance on how do you put the best technology stack together that meets your and your client's needs, so it's

more it's a build by partner type arrangement. Now from a from a build at yourself perspective, we do try and be very focused around sticking within our swim lane so that we can, you know, not have to spread our resources too thin and make sure that we're not leaking into areas where some of our technology partners within the space are going to do a better job than us. So it's being really focused and understanding, you know, how

you're going to deliver value. Just to add on a little bit um, Really three types of decisions, three types of acquisitions you want to make. The first is when you need to do a strategic pivot. There's just a you know your end of life with your particular business model and say okay, I've got the capital, I've got the cash cow, and now let me buy something that gives me a brand new capability, no synergies. You invariably pay too much for it, but in the long term

it pays off because you're safe. The second one is a scale play, right um. And the third one is that capability ad. I remember, back when we did the

scott Trade deal, a couple of years ago. The Wall Street Journal article the day after that was announced was written by an article by a journalist who said, oh, they they're investing too much in the old model, as in the consolidation the scale play of Scott Trade in ourselves, they should have bought a robo advisor And of course at the time they were saying we should have spent five million dollars or thereabouts for uh in a robo advisor player with you know, no assets to speak of.

We looked at that and we and I sort of laughed because this the creation of the of the value by doing the Scott Trade deal was enormous and to all to make the equation of buying a robo player at five million versus building it yourself in terms of the capability at about five million, right, so you would have paid you know, a hundred times what the what it would take you because we already had the capability to put the pieces together and spend a fraction of

the price. So that's sort of the equation. So so since you bring up robo, let's talk a little bit about swab has an automated solution vanguard across the hundred billion in that what do you think of this space? Is this the sort of thing UM Betterment recently pivoted and began offering a white label version of their robo to advisors. What do you guys think of this space? Is something we could see UM a little higher profile or not not in your swim lane. Yeah, so we've

long thought that robo isn't a business model. It's a technology that is just another version of what Tom was talking to. It's a tool that comes along and it provides yet more automated versions of services and UM so there are different versions of that if you go fully automated. The current maturity of of our space and our client's desire is most people try the fully automated model and then realize, you know, you need to bolt on a human element to make it really successful. Because of the

pricing that of the business models. My view is you can't really get to scale until you're at a fifty or sixty billion dollar asset level, and that's really tough for the soul providers and and the the fintech upstarts. To get to that level, there'll be one or two survivors of In my view of robos as a as

a business model. But what you see is the maturation in the industry, which is all the established players come to the party, usually a little later, and they offer that capability and they already have the distribution strength, they have the brand, they have the client perception, and then

they tend to gather assets a lot faster. It's really interesting though, just to add on too, that we were because we have an open architecture technology platform, we were one of the first adopters to go out there and partner with about a dozen, you know, different robo technology firms that some were going directly after the consumer and we're going to be an r A themselves, and found because of all the challenges that Tim dis mentioned, they

don't have the distribution, the brand, the capability. They quickly pivoted to, hey, now we're going to distribute through advisors. And they were expecting advisors to have a bifurcated business model where they were going to go down market and utilize the robo as the solution while they're keeping their high net worth offering the same and they didn't really

see that materialize. So we saw very low adoption and we actually have a product for our retail clients and was built with the ability to pivot and deliver those capabilities to advisors if the demand is surfaced, and it really hasn't come to fruition. We haven't seen a lot of advisor adoption of that type of technology because they just haven't figured out how to you know, biflicate the market and so on and so forth. So both of you have made reference to what's going on in fees.

There's been a transition to some degree from active to passive, but the bigger transition seems to be from expensive too cheap? How much lower can fees get? How cheap is cheap? YEA, Uh, well, I think there's a pressure on um price. Period. It doesn't matter what sector you are in industry, let alone in wealth management, whether it be asset management, whether it be commissions on trades. There's a constant pressure. So why is that, Well, because they're clearly excess rents. They're being

earned um. If a competitor can enter the space eke out a profit, a rational profit or a reasonable profit, and a return on their capital and at a lower price, they're going to do that, That is absolutely a That's a good thing for consumers. That's a good thing for the economy to have price competition. UM, so what does it force you to do? Well? It forces you to get big enough so that you can have scale to be able to match that. On the way down, it

forces consolidation in the industry, which is not always good. Um, but it certainly keeps everybody on their toes. I don't think the pressure is going to abate, because it hasn't to date the h you know we were formed. I'd like to say back to that date when our industry was formed, when the regulation has changed. Think about the regulation that was changed was allowing price competition amongst brokers. UM. I had a chance to to get a copy of

It's a galley copy. It's not yet published. It's the it's the autobiography from our founder, and so I'm reading through it and I'm getting these sort of interesting little anecdotes from uh when uh you know pre I P O and in nineteen seventy five, and the reason why the term discount brokerage actually got coined. I didn't realize this. It was a risory term that was coined by the full service firms because it was supposed to be negotiated commissions.

But they do said another, you're a discount broker, you know, you're just you're just discount notably cheap as in no value add and the time has happened or you know, and and back down because of course it was trades were fifty bucks and sixty bucks of trade and seventy five bucks of trade, and that was a that was the discounted price in and here we are at you know, now call it off that price point or that price point in the intervening period of time, and we're still

talking about the prices are going down to you know, four or three two one zero. UM. My own view is there's no such thing as a free lunch. There never has been. Uh, there will always be, UM a margin that needs to be eked out if there is value provided to clients, and clients will happily pay for for that value. So so let's talk a little bit about that because I love that topic. I think people get so enthusiastic about cheap, which is great, they don't

realize free is misleading because nothing is free. You're paying somewhere. Some of your competitors will go without being mentioned, UM offer free asset allocation, free robo adviser, and then there's a little asterisk, and it turns out that free is kind of expensive. You've discussed this in public in the past.

What what are your thoughts on free? Yeah, so again, theory from my point of view is you don't want to just compete on absolute price, because price itself is a race to the bottom, and it just means you have to be cheap, cheap, cheap, cheap. If if you're if you're having a choice between competing only on price, or primarily on price, or on product or on the client experience, and it is a race to the bottom.

You know, I've said to my team many times, we think we can create the most value and stand out from a client experience point of view in terms of all the capabilities we had for our clients. If we had enough value, you will pay a reasonable price for that value, UM by investing that return, if you will for for the next little while, if prices go down to zero, let's just imagine that. You know, five years from now, UM, prices are gonna go down to zero.

Now there's two ways to compete, product and the client experience, because prices now equated to zero for everybody. And if that's the case, you better have wished you've differentiated yourself on the client experience in needs reading time, because now how do the cheap players compete? Right, they've been very cheap. They probably don't have the differentiating factors. Uh, and as a result, they're going to be stuck a little bit making a difference. So having said that, there is no

zero there is no absolute free lunch. And as you said, there are different pricing models, some of straight up front and some of it has got hidden costs that the client does end up playing somewhere your champion. Yeah, I

mean just two things. I mean from an r A perspective, what's interesting is it's one of the areas and financial services where you haven't seen a lot of price compression, But what you've actually seen is just being advisor being forced to add more services in order to differentiate their value proposition, which adds expense, which makes technology and efficiency that much more important so that you can maintain profitability

and so on and so forth. So technology really is the key, and we think that's going to continue to happen. I think you also need to look at relative value. It's amazing to me when you see one of the major Wirehouses just lowered the cost of their you know, basic out of the box separate account program from two hundred and seventy five basis points to two hundred and fifty basis points is the max fitting. And they didn't go to one fifty, right, so you lets you know

that people are still paying that price. And if you think about what a consumer is getting when they're going to an r A firm that uses t d A and the services that they get in the fact that their advisors sitting on the same side of the tables them and the technology experience they're able to have on a relative basis, they're basically paying less than half for a much better experience. It's it's all about relative value, I think. So you raise a valid point and I

want to throw it towards the audience. How should advisors who are more or less charging similar fees communicate their value add to both clients and perspective clients. It's one of the biggest challenges that we have because what's happening is as advisors add more and more services, some of those services become commoditized depending on what type of business you run. You know, there are many firms out there that are just not trying to generate alpha, just utilizing

index funds and so on and so forth. But yet they are still charging a percentage of assets under management. But where clients find the most value is in the comprehensive wealth management and that financial planning and a state planning and so on and so forth. So we're seeing firms start to figure out, hey, we need to experiment

with minimum fees. We need to think about maybe broadening should it be based upon total net worth rather than just investable assets, because you're you're advising on so much more of a holistic, uh, you know, view of the client's life and their wealth. So there's a lot of challenges out there, especially with the introduction of the robos, where you hear, hey, this robo will do everything for

twenty five basis points. That's tough to market against. But it's the new client that you have to be worried about. The existing client already realizes, oh my gosh, my advisor does so much for me. My life is in order. I couldn't imagine not having the services that they provide. I would never go to a robo that's charging, you know, so articulating that value proposition and the differentiation is is one of the big challenges you have out there. So

Vanguard wrote a piece a couple of years ago. I'm sure half the room is familiar with Advisors Alpha, and it raises the perspective of the behavioral counseling is worth more than the asset allocation, more than the stock picking, more than all those things. Because if in a down draft you panic and sell, and we know tons of people who dump stocks in MARCHO nine and didn't get back for years. Um, none of that matters if your

behavior is inappropriate. So how significant is the behavioral side of what everyone in this room does for their clients. I mean, that's where the juice is squeeze, That's where you know the money is made, That's where the value is delivered. Um, whatever you want to say. I mean, it's it's amazing. There's a great staff from morning start to A client can have twenty nine more income and

retirement if they hire a financial planner. I mean that is an unbelievable stat And and think about most people hire a financial planner of twenty years too late, right, They've already made so many mistakes in their lives that all of a sudden, they're forty five years old and now it's time to go hire a financial planner. If we can get people engaged earlier and getting to avoid some of those mistakes, make the right decisions, I mean,

that value will go up exponentially. So I think it's it's all about the you know, the coaching, you know, don't worry like we're playing the long game. When we see what happens during periods of volatility, most advisory firms shift from going out there and going after organic growth to hey, we've got to placate the base. We've got to make sure that our existing clients are keeping their eye focused on the longer time horizon in a long

term goal. We should anticipate peri into this market volatility, but it's not going to knock us off track. So that is invaluable. It's it's almost a measurable Yeah, I can't can't reinforce that point enough. The power of a discipline process that you work through with your clients are just generally all of us in life. It's the compounding effect of those incremental things that you can do that will make the dramatic difference in the longer term. And

that to your point, is largely holding people accountable. It's that coach. It's that uh, it's that discipline that all coaches, whether it be your financial code tree, your sports coach, or whatever else that enables you to do. Because left to our own devices, clients and ourselves as individual humans won't follow that same discipline. It's just human nature to shoot ourselves in the foot, and the advisor there to

stop that. So speaking of um shooting yourself in the foot, we we know lots of advisors like bells and whistles, and they want more and more and more on their um front ends and back ends of the technology. What is the biggest request you're seeing from some of the new tech What what is this room asking from t

d well. I would say there's two two things. One is around just automating all of the processing right, making sure that we can no longer have to be doing data entry to open a new account or changing your address or anything like that. How can we have a digital environment because that creates efficiency for all of us both at t d A and for advisors, but it

also leads to a better client experience. You know Tim has meant in earlier we spoke to the advisor panel where it's one of the first times you have the intersection of investing inefficiency and improving your client experience are kind of one and the same. So those investments are are really paying off. It's a it's a great way to to look at it because that's the kind of stuff that nobody likes to do, that data entry work.

It's kind of silly in the technology world that we have today the capabilities, we shouldn't have to do that. So so that's a short immediate term. The second thing is as folks are getting pulled into these adjacencies that maybe they didn't give guidance on in the past, things like long term care and elder care and college planning and things like that, you know, even around you know, just managing your your healthcare. What what plans should I

sign up for? These are expertise that advisors didn't necessarily have in the past. So looking for ways to deliver those services at scale with high quality, that's the thing

that we're really exploring now. So we'd love to hear, you know from the audience, you know, over the last couple of days, what are the things that your clients are pulling you in too, as they ask you to help you navigate everything within their financial lives and how can we help you, you know, solve some of those problems. So when Vanguard's new CEO started recently, Tim Buckley, I got to do a ten question Q and A and one of the questions was what keeps you up most

at night? His answer kind of startled me. It was cybersecurity and hacken So first is what keeps you up at night? And how concerns should we all be about digital security? Yeah, I would say if you asked any CEO, very n of them today would say that exact same answer and be included. And you have to ask yourself why.

It's because it's one of those nightmare scenarios that even though we all we spend literally hundreds of millions of dollars on this, it's an arms race and the other side is very much incentive to try and keep you on your toes because if they find a little crack in the door, they can they can not only rob

you and your clients, but you have an idiosyncratic reputational event. Right, So it's one thing to be uh, I don't know, we have a market meltdown, and then anybody that's in the wealth manager space space basically rides that wave UM onto the onto the rocks. If you have a cybersecurity event, it's usually you have been attacked and your clients have been exposed. And that's just a nightmare, an absolute nightmare scenario.

Now I can tell you the counter argument to that. UM. It might seem a little bit a little strange, but as time goes on and there are a number of these data breaches, UM, I think consumers are becoming immune to the next headline that sort of says, hey, a hundred thousand cards here or you know, a million records here, and you know, my the I R S database was breached and the target data and people sort of go, wow,

you had another one. But it's like all things, even though these these incredibly bad events happened to the company, I think consumers are actually becoming numb to that effect. And partly it's because you don't often see that the next follow up article to that, you know, target has a billion you know whatever it is credit cards being breached and a hundred and fifty thousand clients had their you know, financial records erased or money stolen. So the headline risk is huge to c e O s and

so we never want to be in that. And yet what's fascinating is you don't actually see as many of the downstream implications of those breaches coming to fruition and as I've always sort of curious as to what's happening to all that data and why is it not being exploited much greater degree. Are we seeing advisors and clients becoming a little more sophisticated about security. I think we absolutely are. I think it keeps a lot of advisors

up at night as well. And one of the things that we've seen is we've seen the perpetrators move from going after a t d A to going after advisor firm. And now the weakest, you know, link in the chain

is the end client itself. And we see on a daily basis, you know, clients that have their emails hacked and they send an email to the advisor the bad guy and saying, hey, you know, I'm in you know Spain for my sisters, you know, wedding, and I need you know, a hundred thousand dollars wired immediately to this bank account. And it's amazing how many people will just send those instructions in and you know, next thing, you know,

the money has gone. So you've got to be really you know, vigilant and making sure that you are verbally confirming with the client that this is in fact you because email hacks are happening dozens of times a day that we see. Luckily, we're able to prevent most of them because Advisor's awareness has has has has gotten much better.

But it's a it's a serious issue. Yeah. The the social engineering way of hacking in is way more productive in the sense that they find out the name of the principle of the firm or the CEO and find a way to spoof your email get that information. People just say, well, obviously it's not a hack. Per se might just got an email from the CEO saying why are this money or whatever it is. The alternative is

broad scale. You've got to you've got a breach that people get directly in so you know, as firms, we we are now doing much more. We first of all, we're starting with an assumption that says the bad guy is in the walls m and what do you do knowing that you've already been breached? Now that's a supposition because we can't find them, but it changes your mindset is a firm from a security point of view if you assume they're already inside the moat. That's the first thing.

Second thing is we started actually doing um bug bounties, which is literally unlike having a red hat team or a white hat team black hat, depending on how you define them, of internal players to try and find your bugs. You just pay money to people who tell you they found one, and we're actually finding that We've I think we've taken the cost of detecting a bug down by about two thirds, and we're just essentially incenting bad guys to come in and poke at us and then come

and tell us and we'll pay them. Way more effective than just waiting for a very small subset of people with technical skills to actually breach you and find their way. All the way in sounds like it's it's working. Let's let's shift gears a little bit and talk about cash, because people have been discussing raising cash, carrying cash, cash is king. It used to be that cash had a fairly decent yield on it. Some of your competitors have changed the rules that their cash sweeps no longer yield

much more than a few BIPs. If you want to see a return, you have to actually go out and buy some short term bonds, typically through E t F. Tell us about what's going on with cash sweeps, what are you guys gonna do, and what do you think about what some of your competitors are doing. So let mean, let me start with just the macro trends. It goes back to the point about how does arm get paid.

And in a world where let's go all the way back, in a world where you're getting paid three or four or fifty dollars a trade um and interest rates are on an absolute level higher, then you've got a more varied revenue stream. And when you have a rate in a period of rising interest rates, your beta betas tend

to be higher. What we've seen now with other revenue forms, as we said a few minutes ago ago being compressed and an ultra long period of low interest rates than what we've found this most recent cycle, as interest rates start to rise, is the betas have been quite low, and now they've been higher. In forms of cash where there is a higher degree of customer sensitivity to the putting that cash to to work, and in our particular space, because it tends to be transactional cask waiting for the

next opportunity to make a trade. If you're in retail, then that is very sticky cash and it is is it's largely the way that the m has become more

and more compensated for the services provided. And so if you imagine a world where if commissions were to be zero in the brokerage space, cash would be even more important as a way of getting paid and you'll find even less um beta in terms of the value of that cash, which push actually the industry at great strategic risk because uh, interest rates fluctuate and you can have you know, three basis point um short term rates or five hundred or as we know zero for a period

of time. So that's the that's the trend that's been happening in a macro basis. Now, what we do from a cash perspective, we actually look at the differentiation between transactional cash and invest in cash, recognizing that some advisors

want to keep a portion of the client's portfolio. So the sweep is the b d A, the bank deposit account, But you can actually go out and buy a purchased money fund, which yields considerably higher, but you have to go out and actually, you know, take action to put that allocation in place. So let's talk a little about E s G. We've been hearing that this is the

new wave now for I don't know ten years. It seems there's a lot of chatter about it, but there hasn't been a whole lot of uptake from the either the end investor or the advisor. What are your thoughts on environmental, social and governance? Why has it been lagging? When we look at Europe, they're far more aggressively invested in that space then than the US is. Well, let me start from from a public company point of view.

We are feeling it from our investor base, and so they just to focus on what are you doing and wanting to understand what td Meri trades position in this space is actually causing us to spend more time putting energy into it. So it shows you that the underlying trend is absolutely there, and you could say that there has been albeit slower than elsewhere in the world. Old there has absolutely been a trend more to E s G investing. Remember ten fifteen years ago When this was

it was very nascent. The constant argument was you can make those choices, but you will be sub sub performing on your investments as a result of having traded your your your moral case off against your just maximizing your returns. Um That's less true now and the trend, certainly with the younger investor has been very much to put their money where their their morals. And so it's I think it's growing, it will continue to grow, and I'm as I say, I'm feeling it as a public company CEO,

and we're seeing it in our business as well. It's growing, and we are starting to see advisors, you know, especially once it serve a younger demographic, trying incorporate that into

their value proposition without a doubt. I mean, if you look at you know, some of the things that are really important to younger associates, even you know, when you go apply for a job somewhere, they want to know what your company stands for, what your mission, your values, your purpose, I would say more so than previous generations. And I think that you know leaks over into their

investing philosophies and and so on and so forth. So I think you know, the trend will continue to evolve in gain more momentum as some of those younger folks gain more assets on a go for a basis, they will challenge leadership as they should on what value you bring to your clients? Are you on the right side

of causes and issues? Are you on do you take a stand the The express desire for leadership to take stands on issues by your own associates, let alone your clients, but much more by your own associates is is stronger and stronger, and I don't think it's abating. And I'll tell you I mean just from an advisor perspective or serving advisors, it's been an incredibly motivating factor for our associates, you know, to know that they pop up at a better in the morning to help the best people in

financial services do the right thing for their clients. It really makes a big difference. And if you want to get associates to feel good out what they do, you know, just talk about what you do for your clients and obviously your your associates get it. But it's incredibly motivating just to be able to serve you guys, when you're sitting on the right side of the table and sitting on the right side of history. It's it's really motivating. So I was originally a bit of a skeptic when

it came to the issue of direct indexing. I've been hearing about this for a couple of years. My friend Dave Natig at et F dot com has been talking about this for a while, and then over the past year or two, I've noticed we have a client who's the general counsel of a big oil company. His whole life is exposed to oil and energy. Wouldn't it be great if we can just dial down the energy in his portfolio. We have another client who works in finance who's a value manager. His whole life is small cap

value really exposed to that. What are your thoughts about direct indexing and is this something that could basically challenge et fs. I think you'll see two things. I think you're going to see E t F that are specifically focused on They already are out there eliminating some of the sin stocks and exactly you know, with there will be some that are just more broad based, and then you're gonna have very specific things that people can pick to,

you know, eradicate from their portfolios. But then I think what we're also looking at, and I think the whole industry is exploring this, how do you do this through technology in a cost effective way so you can have

clients do that on a custom basis. And we see a lot of our clients are starting to do that, you know, manually and figuring that out and it's becoming part of their value prop and it's some of the things that we're having a lot of discussion around within our organization on how can we help with that and

any thoughts about that direction? Is that something you know, if if you have an individual with a thousand stocks instead of ad T F S, I have to imagine there's a whole lot more complexity and a whole lot

more cost that goes into that. True, but again back to Tom's point, first of all, understanding what is the unmet need that the client has, what problem are they trying to solve for, and then leverage technology to make it cost sufficient to provide It's that simple whatever the need of the particular day is, Yes, it can be costly, but if you can actually deliver a better solution and you apply the assets and the capabilities you already have to do that in a way that needs a need.

There's a margin there to be had. So what is the most This has clearly been a period of giant change over the past ten years, certainly since the financial crisis. We in this room see it from a certain angle. I have to imagine your perspective is slightly different. What has been the biggest surprise of the best decade? What really kind of made you step back and say, wasn't expecting that? Hm? Well, when the financial crisis happened, I remember it very acutely, as I'm sure everybody else in

this room does. My My respective was I was a Canadian banker at the time UH and Canadian banks largely avoided the accident UH and so we had a sort of a view on what caused the accident largely elsewhere in the world. You know, what he called the mortgage crisis, whatever you you thought was the case CDs as another UM. Since then, there was a lot of things that happened that we're completely knowable in advance. The size of the the event itself being the second greatest UH financial event

in our history certainly or UM. And you know, if you look back through history, all of the regulatory agencies that are in the Western civilization were created as a result of those accidents, and the greater the accident, the more the regulatory repercussions. And so you could see that happening from day one that there will be implications. What we probably didn't see happening was just the sheer flatness of the rebound. I mean, here we are ten years later.

Most if you see all of the data for all of the other recessions, they're they're deep, but they're they're basically a v This one's looked like this, and so here we are literally this month and makes it the longest recovery, and there's lots of debates and discussions about okay, well, can can you go for ten years plus a month without having a bullmarket tip over because all the other

ones have. My own view is that because of the sheer flatness of this recovery, um there there is a chance that it could we could eat through the next little while. That's not my base case, I should say, my base cases that we're actually going to be going into a bit of recession, but there's a chance that we could actually slide through this with this inexorable climb

back to the levels we are at um. So that's the surprise to me is just how long it takes for this country and for the world to get back on its feet to where it was after you have that size of an impact. And yet you know, that's been our history. We we have. There's a great thing about capitalism. It has this amazing sort of wealth creation, and then there are big crashes that happened every once in a while and then you and you have to

pick your feet back up and off you go. You know, I would say a little closer to home is you know, the financial crisis was kind of an accelerant for the r a flame if you think about it. Those big wirehouse brands were significantly damaged as a result of that. You know, consumers started to become far more aware of, you know, the relationships that they had and how advisors

were getting paid. Advisors that were in those captive environments said hey, I can do this better on my own and my clients more loyal to me than they are to the brand on the roof. So I think this The momentum that came out of the financial crisis for our space, you know, was really dramatic and it's it's you know, it's been fantastic. So so let's talk about the space and the shift from the broker dealer model to the r i A model. There's been um new regulation.

It's not quite finished, but the word is that regulation best interest is coming forward. It turns out it's neither a regulation nor best interest, but it's a challenge to the fiduciary rule that's on our side. Talk a little bit about the fiducial rule and what does it mean when the brokered side is trying desperately to sound like they're under a fiduciary obligation. So tomorrow, uh, the SEC is going to vote on this and skips in Washington and he'll be there at the at the event, and uh,

it's it's it's pretty pretty incredible. But you know, we believe right that there's still you know, delineation between the forty Act and you know reg b I or however

brokers are are governed in the future. And we do think that there should be a heightened standard for for the way poker's behave, But we're very thoughtful around making sure that the waters don't get muddied, because that could be a bad thing, right, you don't want a situation where a broker who's really acting as a salesperson is positioning themselves as an advisor and saying, yeah, I have to put your best interests, you know first, and maybe

they they're not. So we're concerned about consumer you know, confusion and what that may bring to the table. But of course we want to make sure that there's elevated standards out there as well. And you know, one of the challenges we saw even with the d o L. It's great in spirit, but implementation was, you know, really

going to be a challenge. I mean, we're actually in this room a few years ago where we had somebody give a presentation for an hour and a half and one of the leading attorneys on what the d OL rules gonna look like, and people walked out of here more confused, you know than they were when they walked in. So I think keeping it simple is is something that that will be very important. I know, there's the four page disclosure document that's going to be required, so we'll

see what tweaks ultimately, you know, get made. They're talking about potentially making tweaks to incidental advice. What does that really mean? Seems a little bit like the Merrill Lynch rule that we saw, you know, some years ago. But ultimately I do think it's a good thing to raise the standard on brokers, but we want to make sure we keep that clear delineation between the fiduciary standard and the forty Act and whatever it is that's going to

ultimately govern macro level. I'd say it's going to be a better thing generally for consumers, not as good a thing for the r A space. And what I mean by that is the confusion that consumers will have about the advice and what is advice. Again, we think of it because we're all inside baseball here, we all know the regulations. We know the consumers don't care or they just assume, they assume that the advisor starts with their best interest. You say the word fiduciary and they don't

really get what that is. It just it muddies the water. So the distinction for the r A from the broker dealer model is going to be, if it passes, it's going to be, in my view, a little bit muddy, which again you could say the consumer would better be better off if it drags the brokerage on the community if you will closer to doing better for the client and more in their best interests, but it won't be necessarily as distinctive and offering for the I R A industry.

Am I too cynical when I say RAG best interest is designed to muddy the water's on purpose? It's not best interest, it's cluely not fiduciary. It sounds like that name was designed to be confusing. I don't know that that's the case. I think there was. It was a was very much a reaction to look at the Department of Labor. Rule was well intentioned, but it was flawed and execution it created more confusion because you were dividing it down the aristo line as opposed to across UM

across all types of investments. And so this is an attempt to try and find UM, frankly, a compromise solution. And we know what you know you get when you get a compromise solution. That's uh, what do they say of UM? A camel is a horse designed like there you go, that's that's that's the best example of exactly

what you'll end up getting. But I think also if you look at what's happening in the states, right, I mean you're seeing states now start to you know, propose fiduciary rules, which shows you there's an appetite, you know, there's a demand, something's got to happen. And in the States, that's actually a little bit scary because imagine if you're all of a sudden dealing with fifty two you know, different standards, you know, especially for advisors that operated multiple states.

Firms like td A you know obviously, that operate in every state, and even services that we provide to our you know, clients that want to be in control and do it themselves, things like research that we provide, our education materials could potentially fall under a fiduciary standard, which doesn't make a lot of sense, and then you start limiting consumer choice. So uh so we have to be careful of how this move is going forward. So now let's in the last five minutes or so we have

let's look forward. What does this industry look like five, ten, twenty years in the future. So I think you're going to continue to see the r A s grow and mature. I think you'll see far more automation that we see too than we see today. I think basically everything from a tactical perspective or a day to day operational perspective will be done on an automated basis, and the real value that's going to get delivered is going to be

with that person to person relationship. You know, that empathetic human relationship is really where I think the value gets delivered today, and I think that that's going to be exacerbated in the future. I think it's going to change, you know, where we make our strategic investments as business leaders. I think it's going to change who we hire based upon their skill sets. We talked about this a little

bit earlier. You know, it's no longer going just to the business schools and hiring that person who's a quant type thinker. It's about going through the humanity schools and put pulling in the psychology majors, the sociology majors, the people that have a knackt for developing relationship with clients to deliver on those services. So I think there's gonna be a lot of change in the space. I think demographics is something that we need to take a serious

look at. How do we make sure that our industry is more reflective of the trends of the population in the United States and where wealth is concentrated is going to shift. So there's gonna be a lot of change over the next five to ten, fifteen years. But I do think you know, this space is going to continue to win because it's just a better business model. Put

the client first, and good things will happen. Tim, what are your thoughts looking out a few more ads, Um, there will continue to be consolidation in this space because the investment required to deliver on what Tom was just saying is going to get more and more and more, and it's going to be want to you want to spread it over more and more clients because that's the other big trend, which is it will continue to get

cheaper for clients. Um. And so if you have the scale, you can continue to provide those uh, those additional value added services for the clients, and they will demand with greater transparency. Uh you all of us collectively working in their best interest for for low price. It's just what they will demand. That will be the inexorable trend, and

technology is going to drive that. When you say consolidation, you're talking at the Crestonian level, the advisor level, or across the board yes, yes, it requires scale, and we're going to continue to see fulk development. That's that's what's absolutely not they think about starting up any size company now that's trying to compete in that milieu of of a price point that is maybe a third of what it would have been, you know, ten or fifteen years ago.

It's tough, and so I think it will just continue to be. You'll you'll be driving more and more value. You can create scale quickly through the UH through technology and what it can provide you just you can just pieces. You know, we often use the case that you've got the Ubers of the world and the Airbnbs of the world, of these massive global scale scale players and they didn't exist five or ten years ago because they needed together, um,

you know, assets and and through technology. Um. But you know, scale from for lower and lower and lower price is going to be incredibly important. And I saved this from my last question because I get it all the time from clients, and I know I do a terrible job answering this. Can you explain the historical relationship between t D merrit Trade and t D Bank? Ah? Yeah, well, actually it's a great point. It is a point of

confusion for us, right. Um, So back in twenty fifteen when uh T D that had TV Waterhouse, of course sold its d I business direct investing business to a Merrit Trade and took back of the ownership. So now

TD Bank hasent of the ownership. Um. And you're right about the confusion, because we often have clients walking into our branches and saying, hey, I want to deposit a check for my bank account, and they have clients walking into their bank branches on the East Coast and saying, hey, I want to talk to my advisor about my uh

my brokerage account. And so the historic relationship is powerful in the sense that what it allows us to do TD merrit Trade is to be focused and we have what we call a capital lite model, and by taking these deposits sweeping them over to a bank, it has meant that we haven't needed to become a bank. And if you think about that environment we've been over, especially since the financial crisis, the regulatory scrutiny and pressures on the banks, and some of our competitors have felt that

sting quite acutely over the last decade or so. UM, we've avoided much of that accident we've we've avoided the additional regulatory pressures. We can be generating higher return on our our equity by having this relationship, not becoming a bank, and it just allows my management team to very much focus on being a better provider of of our institutional services and and being a better retail broker. That's my

conversation with Tim Hockey and Tom Nally. It really was quite interesting and I learned a lot meaning a lot of people who have been with t D as a custodian for quite a number of years. Not very often we get to stop and think about how our assets are custodied and really, uh, it's a key part of of asset management, especially from the registered investment advisor side.

If you enjoy this conversation, we'll be showing to look up an inch or down an inch on Apple iTunes, Spotify, Google podcast, Stitcher, overcast wherever you're finer podcasts are sold and you can see any of the previous two hundred and fifties such episodes that we have done over the previous five years. Be sure and check out our podcast in the coming weeks. July twelve is the five year anniversary of Masters in Business and We have some special

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