Confirming their plan to create a retail brokerage behemoth with 24 million client accounts and more than $5 trillion in client assets, Charles Schwab Corp. and TD Ameritrade Holding Corp. on Monday hurried to reassure registered investment advisors that the combination can be accomplished with a minimum amount of disruption.
“We’re confident that with a strategy of combining the best capabilities of both platforms, as well as people and service, that the combined organization will remain the premier custodian for independent investment advisors,” Schwab Chief Executive Walt Bettinger said on a conference call with analysts. “As the dust settles, [we’re confident] independent investment advisors will agree with that assessment.”
The firms said it is too early to determine which firm’s technology and service platforms will survive, or the extent to which advisors will have to “repaper” their client accounts, but Bettinger asserted that RIAs would see more value in consolidating with a single, combined organization.
He also dismissed some analyst concerns that the deal could be snarled by antitrust issues, nothing that the combined firm on a pro forma basis would represent 11% of retail investor assets and 6% of industry revenue.
The integration will begin after the deal closes in the second half of 2020 and could take one-and-a-half to three years, TD Ameritrade said on its website. The target firm emphasized that it will be “business as usual” for advisors until then, though it also emailed its approximately 7,000 advisor clients a letter they can send to clients about the merger.
Competitors wasted little time in trying to leverage the expected anxiety the merger may raise for advisors.
“The disruption and the time to integrate the platforms will be a great opportunity for firms like ours,” said Gabriel Garcia, head of business management and strategy at E*Trade Financial Corp.’s Advisor Services unit for RIAs.
E*Trade last year revived its RIA custody business by buying Trust Company of America but is significantly smaller than Schwab and TD Ameritrade on the RIA and direct-to-investor sides. It is particularly vulnerable to asset-gathering strategies that the new behemoth could adopt and could be forced into its own merger, according to several analysts.
Garcia, whose unit has about 225 RIA customers, declined to comment on the speculation. But he said the firm will continue to invest in the business that he described as “economically viable and healthy.”
Fidelity Investments, the privately held mutual fund giant that works with about 3,900 smaller brokers and independent advisers in its clearing and custody business, was less reticent about opportunities for building market share with advisors.
“[T]his news will force many of them to decide whether to remain with a firm distracted by a long and complex integration,” spokeswoman Nicole Abbott said in an e-mailed statement.
The deal, she added, will “disadvantage investors, including paying extremely low cash sweep rates and taking significant payment for order flow.”
Fidelity has been aggressively marketing the higher rates it pays customers on their cash, while Schwab has stressed to analysts the substantial portion of its profit from spreads between what it pays on, and earns from, client cash. It also has been criticized for directing client trades to execution firms in return for volume payments.
Sarah R. Paris, an advisor at DHG Wealth Advisors that uses TD Ameritrade as the primary custodian for its clients’ $1.6 billion in assets (with about $100 million at Schwab), said the North Carolina firm is hoping for the best but watching closely.
“If this merger does go through, and it has a negative impact on clients, then we would review that relationship and look for a custodian that could serve clients in the best way possible,” she said.
TD Ameritrade generally services smaller advisors than Schwab, as measured by assets under management, and has emphasized to its RIAs that it doesn’t compete with them for wealthy clients through its direct channel or promote proprietary products to the extent that Schwab does, according to Andrew Casteel, chief investment office at Acorn Financial Services, a Virginia RIA with more than $800 million of assets that uses both firms.
He and other RIAs said that TD Ameritrade also has an edge in many of its technology applications.
Bettinger said it is too early to discuss what platforms and software will prevail. But he suggested that TD Ameritrade’s appeal to up-and-coming advisory firms should benefit Schwab in attracting more brokers from traditional firms to the independent advisory space.
“This combination will focus us the opportunity to be successful across a broader array of potential breakways than before,” he said on the analysts’ call.
Bettinger declined to comment on how much overlap there is between RIAs who use both Schwab and TD Ameritrade. But while E*Trade’s Garcia said that larger advisors often played custodian against one another to negotiate better fees and services, Bettinger said RIAs are now recognizing the operational and safety efficiencies of working with a single large platform.
“We’re sitting in a different place than we were 10 or 12 years ago when many RIAs felt like having multiple custodians was actually a risk-reduction move,” Bettinger said. “It actually could be adding to risk now.”
The Schwab CEO also sought to reassure investors that the effect of RIA attrition will be insignificant compared to the economies of scale it will derive in terms of revenue growth and expense savings from the merger.
“You have to have quite significant RIA attrition to make any meaningful percent of revenue of the combined organization, particularly in a post-zero-commission world,” Bettinger said. Return on client assets in Schwab’s advisor services division also is lower than in its retail channel, he said.
In its merger announcement, Schwab said earnings should rise by 10% to 15% within three years of the deal’s closing, while operating cash earnings per share will jump 15% to 20%. The firms also expect to cut $1.8 billion to $2.0 billion of annual expenses, which is 18-20% of their combined cost base.
“Reductions in staff are a necessary part of achieving overall expense synergies,” Schwab wrote in a Q&A about the deal. It said details on determining the cuts will be forthcoming “once the integration process has begun.”
The TD Ameritrade all-stock acquisition follows Schwab’s announcement this summer that it will buy the brokerage and advisory account assets of USAA for $1.8 billion in cash. Schwab reassured investors in a Q&A on its website that it will be able to handle both because the USAA transaction “should be completed before the integration of TD Ameritrade begins.”
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