Schwab-TD Ameritrade deal shifts 'balance of power' in digital advice

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A multibillion-dollar deal places custodians firmly in control of the future of digital wealth management, a dramatic reversal of disruption predictions from just a decade ago.

Charles Schwab annonuced a deal to buy TD Ameritrade for $26 billion that adds thousands of new retail clients and independent advisory firms — and tens of billions of dollars in new digital assets — to the Schwab platform.

The acquisition signals a new phase of competition in digital wealth management, as industry giants shift focus from development to fighting head-to-head for assets. The casualties could be independent robos and even small and middle-sized advisory firms, industry observers suggest, as advice shifts to a model of extreme low cost and massive scale.

“The advisor is already under threat from the commoditization of portfolio management and even to a degree digital planning-based advice,” says Will Trout, senior analyst at Celent. “Now that the balance of power is shifting away from the advisor, there’s all the more urgency to jump in.”

Trout noted custodians like Schwab and Vanguard are planning to start charging advisors new fees for access to their platforms.

And discount brokerages are expected to gain market share in robo advice and become the dominant players by 2023, according to the latest study of digital platforms by Aite Group.

"This would be a well-placed one-two punch for Schwab," says Brian Shenson, former vice president of advisor technology at Schwab. "It certainly also strengthens its already strong position in RIA custody by taking out one of Schwab’s fast-growing competitor."

Industry incumbents were once slow to embrace the digital advice model pioneered by independent robo advisors. As trends suggested a market shift to cheaper, digital-first wealth management options (potentially opening the door to big tech competition), custodians and mutual fund giants launched their platforms.

Schwab and others, including TD Ameritrade, Vanguard and Fidelity, initially focused on converting self-directed customers already part of their asset base into digital wealth management.

The strategy allowed them to quickly leapfrog the independent robo advisor threat. Vanguard’s Personal Advisor Services and Schwab’s Intelligent Portfolio offerings became the platforms with the greatest assets among digital advice players.

While Vanguard is still the dominant force — topping $106 billion in assets on its Personal Advisor Services platform — Schwab’s expected TD Ameritrade deal would grant it $50 billion in digital assets.

Schwab grew its digital assets by 23% year-over-year, according to the firm. Then in April, it borrowed another strategy from digital-first firms, introducing flat-fee subscriptions for its Intelligent Portfolio robo advisor. Digital clients pay $300 for a financial plan and $30 a month instead of traditional AUM fees.

After launching a subscription fee, the San Francisco-based brokerage tacked on $1 billion in new assets in the first three months, according to the firm.

“Further developing and distributing the digital offering to the new customer base — like Schwab‘s flat-fee advisory service — will be key drivers for success,” says Roi Tavor, CEO of the financial research firm Nummo. “At the same time this deal would embolden Schwab’s strong competitive position due to the increased asset and customer base.”

Shenson, who now runs his own eponymously named consulting firm in the Bay Area, says the combination would bring much-needed scale to a market "which is in my judgement in the early innings still."

"Both Schwab and TDA are generally aligned in providing broad access to digital advice," he adds. "Taking the best of both offers, augmenting it in the future with fractional share trading, I think they would be very well-positioned to compete with Vanguard."

There will be a knock-on effect among Schwab’s chief custody rivals, Celent’s Trout agrees.

“This has got to accelerate Vanguard’s efforts to better serve advisors with a hybrid type solution,” he says, adding that offering investment products with low or zero-cost funds is not enough for Vanguard to maintain its digital dominance.

Mutual fund companies, including Vanguard and BlackRock held the most digital assets with 42.1% of total AUM last year, according to Aite research. Discount brokerages, like Schwab and E-Trade, held 34.6%. Advice startups like Betterment and Wealthfront accounted for just 15.9%.

While Vanguard offers a proprietary call center, the mutual fund company may look to offer additional services to advisors, including unaffiliated brokers and RIAs, which could help it expand its distribution network and further sell proprietary products, Trout says.

In May, Vanguard told Financial Planning it is in “the beginning stages” of rolling out its PAS platform to financial planners.

While Vanguard may be better known for its retail offerings, advisors manage about 35% of the $5.6 trillion in AUM at Vanguard, according to Tom Rampulla, head of Vanguard’s Financial Advisor Services division. Launched in 2002, the firm’s financial advisor services unit serves 60,000 advisors from firms like Merrill Lynch and Creative Financial Planning.

Vanguard declined to comment for this article.

Some industry executives said this realignment of power in brokerage and wealth management is a result of Schwab creating cost pressure among its peers.

Schwab dropped commission on trades in October, forcing the industry to follow suit. The ensuing price cuts created a negative outlook for the brokerage industry by Fitch Ratings.

At the time of the announcements, Schwab expected an approximate $100 million loss in quarterly revenue. Its largest competitors projected similar outlooks: TD Ameritrade anticipated a $240 million loss per quarter, while E-Trade estimated losses in revenue would have been approximately $75 million in the second quarter due to the drop in commissions fees.

One way discount brokerages could make up for lost revenue is by pushing clients into their managed portfolios. TD Ameritrade recently announced it was slashing its minimum account balance to $500, provided clients set up recurring deposits. E-Trade lowered several of its investing barriers, including a new $500 minimum for its core and mutual fund portfolios.

“It was a genius move to cut commissions, then wait and buy [competitors] on the downswing,” says Jud Mackrill, CMO of Carson Group. “If your on the M&A team for a brokerage firm, you’re going to be really busy for a really long time.”

In this market, many agreed, the winners will be firms that can grow assets through corporate acquisition rather than relying on advertising alone.

“The wealth management industry more broadly faces pressure on commissions and fees, making it more critical to have scale in order to optimize cost efficiency and protect margins,” says Michael Taiano, senior director of financial institutions at Fitch Ratings. “If this deal occurs, smaller players may get squeezed further on pricing.”

It will likely be a difficult adjustment for all competing firms, says David Lyon, CEO of Oranj.

“The industry is at a major inflection point and is in the process of rediscovering how they are going to change their business model moving forward to be able to compete at scale,” Lyon says.

The expected acquisition raises questions about possible integrations and providing customers with a smooth transition, says Joel Bruckenstein, founder of the advisor technology conference T3.

“Technologically, there have been differences,” Bruckenstein says, adding that the systems are likely not fully compatible. “That will be a challenge,” for Schwab.

Shenson says while a challenge, it still would be a fit for the custodian's ongoing development.

"Schwab would continue its relentless drive to add scale to its core businesses," he says. "There would certainly be a whole host of integration issues to work through as it sorts through platform, service operations and talent. But on balance these business are not that dissimilar."

This story was updated on Nov. 25th.

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