Schwab Gobbles a Rival Supermarket. Now What, Fundsters?
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Tuesday, November 26, 2019

Schwab Gobbles a Rival Supermarket. Now What, Fundsters?

A giant discount brokerage and RIA custodian is buying a smaller rival. It's not yet clear what the deal will mean for fundsters who work with the two firms, and it appears the combination will take years to work through.

Walter William Bettinger II
Charles Schwab & Co.
President, CEO
Yesterday Walter Bettinger, president and CEO of Charles Schwab [profile], and Steve Boyle, executive vice president and chief financial officer of TD Ameritrade, officially confirmed last week's rumors that Schwab is acquiring TD Ameritrade in a $26-billion, all-stock deal. Credit Suisse Securities advised Schwab on the deal, while PJT Partners and Sandler O'Neill advised TD Ameritrade's board's strategic development committee. Davis Polk & Wardwell gave Schwab legal advice, while Wachtell, Lipton, Rosen & Katz did so for TD Ameritrade.

As part of the deal, TD Bank Group (which owns about 43 percent of TD Ameritrade) is expected to gain a 13.4 percent stake (with a 9.9 percent voting interest) in Schwab, plus two Schwab board seats. (TD Ameritrade will also get a Schwab board seat.) Meanwhile, Boyle is stepping up immediately as TD Ameritrade's interim president and CEO, succeeding Tim Hockey, who was previously expected to leave at the end of February 2020. (The combined company will also shift its headquarters to the Dallas-Fort Worth area, from Schwab's current HQ in San Francisco and TD Ameritrade's in Omaha.)

As of the end of October, Schwab had 12.189 million active brokerage accounts, 1.374 million banking accounts, 1.735 million corporate retirement plan participants, and $3.8546 trillion in client assets. TD Ameritrade, for its part, has 12 million client accounts and $1.3 trillion in client assets. The combined firm post-merger is expected to have 24 million client accounts, more than $5 trillion in client assets, about $17 billion in annual revenue, and about $8 billion in pre-tax profits. (By comparison, rival supermarket, Fidelity had 30 million individual customers and $7.8 trillion in customer assets as of September 30, 2019, and last year it brought in $20.4 billion in revenue and $6.3 billion in operating income.) (Also, our sister publication, 401kWire, highlights more on the retirement plan businesses of Schwab and TD Ameritrade.)

In terms of RIA support, as of earlier this fall, more than 7,500 RIAs worked with Schwab and more than 7,000 RIAs worked with TD Ameritrade (though many RIAs are multi-custodial, so it's a good bet that there's some overlap).

Revelation of the Schwab-TD Ameritrade deal comes after the two rivals both eliminated trading commissions, for retail investors and RIAs, in ETFs, options, and stocks. Those changes took effect in early October, with other discount brokerages (even including Fidelity, eventually) making similar moves.

Put the TD Ameritrade deal and the elimination of commissions together, and it's hard not to wonder what the future holds for asset managers who deal with Schwab and other discount brokerages. For one, the elimination of commissions obviated the supermarkets' exclusive NTF ETF platforms, platforms that ETF providers have paid big bucks to be a part of; now those supermarkets' RIAs and individual investors can trade all ETFs without paying ticket charges. (So much for ETF OneSource.) That's good for ETF shops who didn't (or couldn't) pay to be on those NTF ETF platforms, but it's also good for the giant ETF shops with the biggest scale, the lowest fees, and the biggest brands. Newcomers and upstarts with less scale and brand may have a tougher time getting noticed if they can't land exclusive spots on such limited platforms.

Secondly, the elimination of commissions also makes it possible for individual investors and RIAs to use mutual funds' publicly disclosed (though backwards looking) holdings to replicate the strategies by buying individual stocks (and even fractional shares) themselves without bearing the cost of trading fees. (Liquid alts and fixed income shops may not have to worry on this front yet, since their underlying securities aren't as easily accessible to retail investors.)

Third, the extra size and scale of the pending merger may make Schwab an even tougher negotiating counterpart for asset managers looking to get on its OneSource platform for distribution. And fourth, Schwab's bigger asset management business (including its ETFs) may spill over on TD Ameritrade's platform, providing extra asset management competition on a platform that historically wasn't big on proprietary products.

Whatever the impact of the Schwab-TD Ameritrade deal, it may take several years to play out even the first stages. The deal, pending shareholder and regulatory approval and the like, is not expected to close until the second half of 2020, and the integration of the two firms is expected to take between 1.5 and three years beyond that. "For now, it's business as usual," the TD Ameritrade Institutional folks are telling their RIA allies.

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