The Real Story: TD Ameritrade Goes on the Defensive

TD Ameritrade AMTD encountered a serious technology glitch last week: Legacy TD Waterhouse customers had difficulty obtaining online access to their accounts for three days. I should know: I'm one of those TD Waterhouse customers.

After growing frustrated with the inability to access my account and long waits to reach a customer service rep, I realized the outage could put the company in jeopardy of missing their numbers or seeing a wave of defections from their newly acquired Waterhouse clients.

Spokesperson Kim Hillyer said that although the problem would naturally affect trading revenue, the company is "still within guidance." On April 24 , the company raised EPS guidance by 3 cents for fiscal 2006, which ends Sept. 30, to 94 cents. Wall Street has taken a more conservative view with a consensus estimate of 91 cents. Nevertheless, the sell side is bullish, with 10 analysts rating the stock a buy and only two holds.

Although analysts remain enamored with TD Ameritrade and potential investors may be wooed by a roughly 30% drop in share price over the past month, it's best to wait before getting involved with the stock, which was recently down 3.5% at $14.78. TD Ameritrade operates in a fiercely competitive business that is increasingly commoditized. Customers won't tolerate technical problems, and last week's glitch only further complicates the company's efforts to transition itself from its historic reliance on active traders.

In order to facilitate its goal of being a more diverse wealth manager, the company acquired TD Waterhouse in January, inheriting over 2.2 million accounts in the process and raising the firm's total to over 6 million accounts. One of the plums of the deal was the fact that Waterhouse was the third-largest player in the Registered Investment Advisor segment.

Brokers and financial planners who are not employees of a brokerage can choose where they want to house clients' accounts. These types of accounts are desirable, as the advisors tend to bring in large amounts of assets at once, and TD Ameritrade hopes to increase that part of its business.