By James Langton

(November 22 – 12:55 ET) – Asset accumulation, not trading activity, is the key to discount brokerage success says Morgan Stanley Dean Witter analyst Henry McVey.

MSDW is out with a new report on TD Waterhouse, handing the stock a rating of Outperform. MSDW says TD Waterhouse offers a “solid value proposition” in its full array of products, high-quality service, multi-channel distribution and attractive pricing alternatives.

It notes that TD Waterhouse is becoming more diversified across its product line, with mutual fund assets of US$38.6 billion, up from US$31.1 billion a year ago. MSDW views this growth as critical to long-run success for TD Waterhouse. “Key to our investment recommendations in this space is our belief that assets, not trades, are the key long-term drivers of shareholder value. Management at TWE operates in this fashion, as the firm has been repositioning its branch representatives as ‘asset accumulators’.”

MSDW says TD Waterhouse’s “skinny” branch network will allow it to grow accounts and assets more quickly and profitably than both full service and virtual firms. It also is well positioned for global growth.

That said, MSDW also argues that account growth will get tougher as many early adopters have already moved online. The slackening use of margin debt is hurting discounters, too. “This decline is significant, as this business represents one of the most lucrative revenue streams for both TWE and the industry.”

Another potential weakness that MSDW sees is clients using mutual funds more and trading less. “We believe that the company’s asset gathering strategy and nimble expense structure could help cushion some of the adverse effects of a market slowdown.”