Pay-to-Play and “Premier” Funds at TDA

(Let me say this isn’t intended to be directed specifically at TD Ameritrade.  Every major custodian is doing a No-Transaction-Fee platform these days. TDA’s piece just happened to land in my mailbox).

So, I got this in the mail yesterday.

I had an aching suspicion of what could be inside and opened the envelope with such haste that my wife probably thought we won the lottery. The results did not disappoint! This “premier” list of funds is comprised entirely of funds paying to play in TD Ameritrade’s No-Transaction-Fee platform.  One fund company was conspicuously absent – Vanguard. (Dimensional was absent as well, but they do not provide access to retail direct investors.)

Investors opening this mail expect to find the funds Morningstar considers the “best” for them to buy at TD Ameritrade (henceforth TDA).  They are, (from the material itself) “the top selections by the independent investment experts at Morningstar Associates…” In fact, this is a list pulled from a subset of funds available to buy at TDA without a transaction fee, and therefore automatically excludes any fund company not willing to pay to be a part of TDA’s No-Transaction-Fee platform.  (For more on NTF platforms, read The High Cost of No-Transaction-Fee Platforms). In fairness to TDA, they do disclose that this list is selected from their NTF platform in the fine print.

Here’s a snapshot of what is inside:

TDA offers some trailing performance and each fund’s expense ratio.  None of the investments are compared to any benchmark, let alone a relevant benchmark.  An index fund actually sneaks on to the list – SSgA’s S&P 500.  This fund carries an expense ratio of 0.20%, a multiple of four times the cost of the Vanguard S&P 500 ETF (0.05%) which TDA investors can buy for $9.99. Of course, the SSgA fund has to be more expensive because they are sharing revenue with TDA to be on the NTF platform.

If we were all being honest about what the “independent investment experts” at Morning have to say about picking the best funds, this would just be a list of the least expensive funds and ETFs available through TDA as Morningstar has already admitted costs are the only indicator of future performance. But that doesn’t make for great marketing for TDA or Morningstar, nor does it drive much revenue for TDA.