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How a Schwab, TD Ameritrade deal would reduce advisor choice

Now that commission-free trading has slashed revenue at discount brokerages and custodians, two of the largest players in the space may take steps to halt the bleeding.

Charles Schwab has agreed to purchase rival TD Ameritrade for $26 billion, according to reports. The possible deal has not been officially announced or confirmed by the companies. Still, analysts and advisors have speculated on some sort of combination in the custodial industry since the firms dropped commissions to zero in October. TD Ameritrade CEO Tim Hockey fielded six questions about M&A on the company’s most-recent earnings call at the end of last month.

Schwab and TD Ameritrade spokesmen did did not respond to requests for comment.

Any possible deal could face regulatory hurdles and, if it occurs, could become a major disruption for advisors. Schwab and TD Ameritrade are two of the four largest players in the retail brokerage and RIA custody space, each custodying assets for more than 7,500 independent advisory firms.

“We think this deal may face somewhat significant antitrust hurdles, depending on how the competitive market is viewed by relevant authorities,” wrote Keefe, Bruyette & Woods analysts in an equity research report following news reports that the combination could be announced as early as today.

RIA custody clients at custodians 11/11/19

Schwab holds roughly 50% of RIA custody market share, while TD Ameritrade holds about 15% to 20%, according to the analyst report. Major competitors are Pershing, which custodies about 750 RIAS with $734 billion in assets, and Fidelity, which custodies more than 3,000 RIAs, according to the companies (Fidelity does not break down assets by RIAs specifically).

“Because the combined market share [of Schwab and TD Ameritrade] is so significant, I wonder if the government may jump in here,” Tyler Gellasch, executive director of Healthy Markets says.

If the deal goes through, advisors would have fewer custody choices, says Brice Carter, an advisor at Financial Strategies Group, which custodies at TD Ameritrade. He notes that planners who use the Omaha-based custodian have received no communication about the potential deal.

“Competition is good for consumers and advisors of course, so if you take one of [Schwab’s] biggest competitors out of the marketplace, regulators might have a hard time with that,” he says.

Jud Mackrill, Chief Marketing Officer of Carson Group, which custodies with TD Ameritrade Institutional and Fidelity Investments, highlighted the importance of having multiple custodial players.

“We still need more competition. Competition gets a little lost in this,” he says. “Fundamentally we know there will be less choice for advisors and that's not a positive. When we take away choice, that's a negative.”

Carter was quick to question what an acquisition would mean from an operational standpoint for those who custody at TD Ameritrade.

“I think the number one concern advisors are going to have is service,” Carter says, noting that he is skeptical whether one $5 trillion company can offer the same kind of quality he is used to getting now. Carter also expressed concerns regarding TD Ameritrade’s Veo One platform and the tech stack he had carefully built to integrate with it. “I’m really happy with that. I really don’t want that to change,” he says.

Jason Wenk, founder of startup custodian Altruist which is launching in December, says company combinations are always challenging and he would expect integrations to “become bizarre.”

“If an advisor is thinking about efficiency, this certainly doesn’t make me optimistic about [it],” Wenk says.

In addition, some advisors are expressly allegiant to TD Ameritrade, and are skeptical of Schwab’s commitment to RIAs.

“80% of TD’s growth comes from RIAs. That has been, and is, their focus,” Carter says. “TD was a partner and I didn’t see it as a competitor. Now you have Charles Schwab, which is doing financial plans for $300.”

Consumer advocates like Gellasch worry about the impact this possible combination would have on smaller advisors.

“The custody business for smaller advisors is already not very competitive,” he says. “This would make it even less so, if it were to go through.” He added that the potential combination this deal could make it more difficult for smaller advisors to get information about how their orders were handled.

Still, wealth management analyst Greg O’Gara at Aite Group says advisors should see the possible deal as a net positive.

“I think it’s going to be less about TD Ameritrade RIAs being uncomfortable with the combination and more about Schwab RIAs being enthusiastic about it,” he says. “TD has an industry-leading digital platform, a great tech ecosystem, and none of that is going to change.“

In addition, O’Gara says this could help solve tech integration problems that arise from using multiple custodians across a practice.

“Advisors have to integrate and access different technologies, as do their clients, with different portals and client interfaces for the underlying investors,” he says. “With one less custodian out there, it starts to simplify the landscape a little bit.”

Few will argue the possible combination would shrink a competitive landscape.

“In essence, it’s Schwab and Fidelity now,” Wenk says. “TD was always biting at their ankles anyway, and now they’re not.”

Analysts had been speculating about possible consolidation after custodians undercut their revenue model by slashing commissions for equity, ETF and options trading to zero.

TD Ameritrade had anticipated revenue would drop by $220 to $240 million per quarter after it announced it would offer free trading to both retail and RIA clients.

Should it happen, the deal would take place at a time of transition at TD Ameritrade. CEO Tim Hockey announced at the end of July that he would resign as chief executive from the firm, citing disagreements. At the time, he declined to comment on analyst questions on whether the disagreement had stemmed from discussions of a potential acquisition.

Schwab is currently working through the details of a deal with USAA it announced in July. The brokerage said it will purchase 1 million brokerage accounts from USAA in an acquisition expected to close in 2020.

“If you are on the M&A teams of any of these companies, you're going to be busy for a very long time,” says Carson Group’s Mackrill.

For advisors like Carter, and the more than 7,000 RIAs on TD Ameritrade’s platform, any changes would also be personal.

“You’re on first-name relationships with people [at TD Ameritrade]. You know their kids’ names,” he says. “But it’s all part of being a business owner, I guess. We’ll have to see.”

A Pershing spokeswoman declined to comment, and a Fidelity spokeswoman did not respond to a request for comment.

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