| 09 February 2010

E*TRADE Financial (ETFC) added a line-up of actively managed portfolios to their mix of products today. We think it's a good move for E*TRADE and we'll explain why. But first, let's take a look at the details of the product.

With minimum investment of $25,000 E*TRADE customers can benefit from one-on-one portfolio management; a service usually resevered for much larger accounts. The process starts with a consultation and a selection among several managed portfolio styles, such as "aggressive income" or "conservative growth." Then (what we would call) a semi-custom portfolio is developed for the client, based on their unique profile and goals.

Individual portfolios are automatically re-balanced at recommended intervals. E*TRADE would collect an asset-based fee for the service. Administrative services, investment research, portfolio selection recommendations and due diligence suppot will be provided by PNC Investment Management. E*TRADE did not disclose the terms of the deal with PNC.

This is a good move for E*TRADE because, as we've reported, there's a new normal in the world of online broker fees and pricing. Some (correctly) predicted a price war less than a month ago. And we suggest that the war has already ended.

E*TRADE has, for some time, offered full-service advice for clients with portfolios of $250,000 or more. But this their is the first effort to bring managed accounts to smaller portfolio sizes. The move is designed to shift the company away from a commission-heavy model to a model that generates more income from assets under management.

"Managed Investment Portfolios are a key milestone in the evolution of our business strategy to focus on attracting mass affluent investors while gaining a greater share of our customers' investable assets," said Mr. Michael Curcio, president of E*TRADE Capital Management.

Charles Schwab (SCHW) has offered managed portfolios for years. In fact we recently reported that new enrollments in Schwab’s fee-based advice options (which include managed portfolios and more expensive advice offerings) increased a whopping 61% in 2009 vs. 2008.

The pressure is on for firms that have thus far focused mostly on trade commissions. Now that interest rates are near-zero and payment for order flow is diminishing, firms like OptionsXpress (OXPS) will be forced to find alternative forms of revenue.

Whether the increase in managed account products is a good trend for investors, however, is debatable. Managed portfolios, like target date funds or fund of funds, can be costly and ineffective. BrightScope unveiled a very nice, detailed rebuttal to the Investment Company Institute on the effectiveness of target date funds today. We have also scoffed at the problems target date funds create over at Learning Markets.

These same problems can exist for managed portfolios, especially when these semi-custom portfolios are pooling a large number of high-fee funds. A laddering of fees can have a disproportionately high impact on smaller account sizes, especially.