MutualFundWire.com: Schwab's Brokerage Deal Victory Comes With an MF Ally

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Thursday, August 15, 2019

Schwab's Brokerage Deal Victory Comes With an MF Ally

Thanks to a pending brokerage acquisition, a publicly traded, multiboutique asset manager will be amping up its relationship with Charles Schwab.

David C. Brown
Victory Capital Holdings, Inc.
Chairman, CEO

"We're going to be very successful in the [direct] channel with Schwab," Dave Brown, chairman and CEO of Victory Capital [profile], told analysts on Victory's Q2 earnings call (as transcribed by Seeking Alpha) on Tuesday. Brown was specifically responding to a question from J.P. Morgan analyst Ken Worthington. "And then don't forget Schwab is a very good partner of ours and we are going to work very closely with Schwab to make it a win-win relationship between members, between Schwab and between Victory and ultimately USAA."

On July 1, Victory closed on its planned acquisition of USAA's Asset Management Company (USAA AMC), and Victory has moved its headquarters to USAA's hometown of San Antonio. Brown has pitched the deal (which will cost Victory up to $1 billion) as boosting Victory's scale, expanding its product lineup (especially on the fixed income side), allowing Victory to find "expense synergies," and amping up distribution by giving Victory direct access to USAA's millions of members. Victory even gets to keep using the USAA brand for funds.

Then, on July 25, Schwab unveiled a $1.8-billion cash deal to buy $90 billion in brokerage and managed portfolio business from USAA. That deal is expected to close sometime next year.

On Tuesday's call, Brown told analysts that, if anything, the Schwab USAA deal is a positive for Victory.

"Schwab is a longtime client, business partner, and friend of Victory. We respect and admire their business and their culture and look forward to continuing to sell the USAA mutual funds and ETFs through their platform," Brown said on the call. "Additionally, we believe Schwab will be effective in garnering new member assets for the wealth management business, some of which will flow to the USAA mutual funds and ETFs."

Brown confirmed that USAA's "exclusive referral" deal with Victory — for mutual funds, ETFs, and 529s — "will not change with the Schwab acquisition."

"We've a two-year assurance that the assets will stay from close and that's in the contract," Brown said in response to a question from Bank of America analyst Mike Carrier. "We pay an arm's length revenue share fee today to USAA for those assets. We will pay that to Schwab when the transaction closes."

On Monday, the Victory team reported Q2 adjusted net income with tax benefit of $0.38 per diluted share and revenue of $91.36 million, missing expectations by $0.01 and $2.85 million, respectively. AUM reached $64.077 billion on June 30, 2019, up 10.25 percent for the quarter and up 2.93 percent year-over-year. By July 31, 2019, AUM climbed more than 130 percent more (thanks to the USAA deal), to $147.8 billion.

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