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Schwab’s $26B deal for TD Ameritrade has small RIAs asking: What about me?

Charles Schwab's $26 billion deal for TD Ameritrade creates a goliath in wealth management. But what does it mean for the many small RIAs who custody with TD?

“I’m concerned that, with this merger, they may carve out smaller advisors like myself,” says Robin Giles, a solo advisor focused on financial planning who custodies $8 million in client assets with TD Ameritrade Institutional.

The deal, which is expected to close in the second half of 2020, will bring significant change for the more than 7,000 RIAs custodying at TD Ameritrade — if the acquisition is approved by regulators.

Schwab and TD Ameritrade are the No. 1 and No. 2 custodians by number of RIAs, with $3.8 trillion and $1.3 trillion total client assets on their platforms, respectively, across their discount brokerage, robo advisor and RIA custody platforms. The deal could alter tech integration, service and innovation for advisors.

“[A] concern is that, down the line, Schwab does goes back to what they used to do, which is not deal with smaller RIAs and blow them off,” says George Papadopoulos of his eponymous firm which custodies $42 million at TD Ameritrade.

Giles says she was already missing out on some opportunities at TD Ameritrade due to her firm’s size. Last year, she says was not invited to the LINC conference, which she had attended since 2005.

Charles Schwab revenue, April 29, 2019

“[Smaller advisors] may not be as important, but we are still a part of the business and have something to give and something to learn, so it was really disappointing to me,” she says.

Giles says the smaller advisor might get even shorter shrift.

“The conference was just a drop in the bucket compared to what might happen going forward [to Schwab] for advisor like myself,” she says, noting that Schwab may not want to service an advisor as small as she is.

Diane Pearson, an advisor with the $109 million RIA, Garrett Investment Advisors, has had a positive experience with TD Ameritrade but questions whether the service will continue. “It’s responsive, [we get] answers within an hour, they figure things out for us really quickly,” she says. “With Schwab, we might be considered a smaller advisor too.”

Still, not all advisors are concerned, including Kaleb Paddock, a member of the XY Planning Network.

“[Schwab is] evolving with the current landscape, but their history and reputation has very much been pro-advisor and pro-RIA,” he says, noting he feels protected under the XYPN “umbrella.”

Though Papadopoulos has concerns, he says he is generally optimistic after attending Schwab’s conference earlier this month.

“I must admit — I was very impressed by the quality across the board. Quality people. Quality technology. Dynamic speakers,” he says. “Maybe this is wishful thinking on my part, but I’d say if this deal goes through ... I think they’d do a really good job,” he says.

Competitors see the deal as an opportunity to attract clients.

“You're going to have to transition your book. You're going to have to meet with every client and get paperwork signed, paperwork for ACHs, wires, beneficiaries, et cetera. That is a total disruptor to their business,” says Robb Baldwin, founder of custodian TradePMR, which services about 400 RIAs and 700 advisors.

PAINFUL TRANSITIONS
Baldwin says this deal reminds him of the challenges he faced in 1998 when TD Waterhouse bought the discount brokerage he was affiliated with, Jack White. “I know it's been 20 something years, but the truth of the matter is it's just painful, and it's so disruptive to the industry,” he says.

Dan Skiles, president of Shareholder Services Group, an RIA custodian that services over 1,400 independent advisory firms, says he was talking on the phone with advisors all day Thursday when news of the possible deal broke.

“My headset battery went dead [Thursday],” he says. “I don’t think that’s ever happened.”

Skiles says he has been hearing smaller advisors complain about reduced service at larger scale players for some time. “I know advisors are already experiencing that,” he says.

While the deal could still face regulatory hurdles, analysts at William Blair “doubt the companies would pursue a deal if they thought there was a good possibility of it getting blocked,” according to an equity research report.

Some analysts are optimistic this deal will benefit shareholders. “We think that 1+1 would equal more than 2 in a combination between Schwab and Ameritrade and would create an even stronger competitor,” wrote JMP Securities analyst Devin Ryan in a research report last week.

Will smaller advisors change they way they manage their firms after Schwab buys TD Ameritrade?

“My business model is obviously not what the big custodians are probably wanting, because of the asset level, but to me, I find it fulfilling, and it’s the way I want to work,” Giles says.

A TD Ameritrade spokeswoman declined to comment. A Schwab spokeswoman did not return a request for comment.

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