TD Ameritrade CEO: We’re ready for battle in the zero commission wars

Online brokers are beginning to adjust to life without commissions. TD Ameritrade is the latest broker to report solid earnings and revenue, even though it is about to take a big hit from eliminating commissions.

TD Ameritrade’s better-than-expected financials follow similarly strong numbers from rivals Charles Schwab and E-Trade, which also announced plans earlier this month to drop commissions.

CNN Business spoke with TD Ameritrade CEO Tim Hockey about the results and how the company is planning to adapt to a new, commission-free world. The stock rallied about 2% Tuesday on the solid earnings.

But its shares are still down about 18% since the industry announced the seismic shift to zero commissions earlier this month. Rival online brokerage stocks all initially plunged after announcing the plan. The fear was that they were all about to lose a lucrative recurring revenue stream.

‘Zero commissions doesn’t mean zero revenue’

It’s going to get a lot tougher for TD Ameritrade and its rivals, because the playing field is now level.

Interactive Brokers was the first ax commissions late last month. Other firms, including Ally Financial and Fidelity, quickly followed the moves of Schwab, E-Trade and TD Ameritrade.

Even though TD Ameritrade has acknowledged that ending commissions will lead to about a 15% to 16% hit to its overall sales, Hockey thinks investors became too pessimistic.

“Zero commissions doesn’t mean zero revenue,” he said, noting that the company plans to bolster its asset management business to compensate for some of the loss in sales. It also plans to cut expenses.

Hockey said the move to zero was inevitable — but he conceded that the board decided to respond quickly after Schwab eliminated commissions because TD Ameritrade would have been in a tough spot competitively if the firm didn’t match Schwab’s move.

He added that since virtually every brokerage is now offering zero commissions, TD Ameritrade has an opportunity to gain business from rivals — including red hot trading apps like Robinhood that are popular with younger investors as well as asset managers like Goldman Sachs and Morgan Stanley.

“Our view is that the online broker category overall will grow more rapidly and continue to take more share from traditional wealth managers,” Hockey said. “The sword of Damocles has finally fallen upon us with zero commissions but we are still growing.”

Hockey said that TD Ameritrade will continue to promote its technological edge, investor education tools and other services as something that differentiates it from the rest of the brokerage pack.

TD Ameritrade on shopping block?

Still, there are questions about whether TD Ameritrade may need to partner with a larger rival to stay competitive.

Canadian banking giant Toronto-Dominion owns about a 43% stake in TD Ameritrade and there has been occasional chatter about whether the bank is looking to cash in with a sale of the brokerage.

That’s a call that most likely will be made by whoever succeeds Hockey, who surprised Wall Street in July when he announced plans to step down. He said he will leave once a replacement is found.

Hockey was coy about a possible sale, telling CNN Business that “the brokerage industry loves to talk about M&A” and adding that his standard answer when asked about selling the company is that “we will always take a look at something that makes strategic sense.”

So don’t be surprised to see the next TD Ameritrade CEO having to contend with questions about a merger, too. The move to zero commissions could spark a significant round of consolidation in the brokerage business.

To that end, some have wondered if E-Trade could be a takeover target. Analysts at financial services research firm KBW recently cast doubt on chatter that Goldman Sachs, which is bulking up its Marcus retail banking arm, or Morgan Stanley might make an offer for E-Trade. E-Trade didn’t rule out any deals when it reported its earnings last week.

“We’re well aware that a possible combination or alternatives could accelerate shareholder value. If that’s the case, we remain open really to all discussions, as we always have been, around the direction that we should take to drive that value,” said E-Trade CEO Michael Pizzi during a conference call with analysts.

He added that E-Trade is “always open to look at transactions that will deliver more value for our shareholders than sort of a stand-alone performance.”