Charles Schwab’s estimated $26 billion acquisition of rival discount broker and RIA custodian TD Ameritrade would, if finalized, cement Schwab’s position as the largest RIA custodian in the industry by far, holding more than half of the assets managed by registered investment advisors.
It would be a transformative shift in the wealth management landscape, creating a dominant power among the fast-growing RIA channel, reorienting the direction of the remaining custodians' tech roadmaps and putting Schwab, the upstart discount brokerage firm founded by Charles Schwab in 1971, on equal footing with the largest of the traditional Wall Street wirehouses. It could also threaten the cost-conscious innovation and support that smaller advisors depend on.
The merger, assuming it’s approved by regulators, will combine Schwab’s $3.8 trillion in client assets, of which $1.8 trillion is in advisory services, with TD Ameritrade’s $1.3 trillion. TD Ameritrade doesn’t break out assets on the platform from the RIA channel, but it has an estimated 11% of the more than $4 trillion market of indie RIAs. The combined firm could have over $5 trillion in assets, with an estimated $2.2 trillion of that total custodied for some 13,500 RIA clients.
In terms of advisors and assets, that would equal, if not beat, Wall Street's larger wealth management firms, even as the business model differs. Bank of America Merrill Lynch has 14,000 advisors handling some $2.3 trillion in assets, while Wells Fargo has an equal number of advisors managing $1.6 trillion in assets.
The combined firm would be a “goliath in wealth management,” said Mike Mayo, an equity analyst with Wells Fargo, and signals the competitive landscape for wealth management is shifting, further blurring the lines between wirehouses and RIAs.
“The strategic risk is that (a) new larger firm, post-integration, would set its sights even more on the wirehouses, creating pricing pressure at the upper end of wealth management,” Mayo said. The combined brokerage would be far more efficient than traditional wealth management players, Mayo said. The new Schwab “would have an even greater budget to spend on technology and innovation … potentially creating an arms race” and a sense of urgency to implement technology that would lower costs further.
Among custodians, some analysts say this is one step in a larger but inevitable shakeout—and could accelerate a change in the custodians' business model.
As technology commoditizes much of the trading, asset allocation and portfolio management business—including the recently completed "race to zero" for trading commissions—custodians are losing some of their value drivers, including trading fees, yield spreads on idle cash and revenue sharing arrangements with asset management firms. That fee compression may move custodians toward different pricing models, including charging RIAs an all-in basis point fee for custodial services as opposed to a la carte third-party fees on the platform. In that scenario, analysts say, scale wins the day.
“In short, I’d say we are seeing the start of a winner-take-all struggle between Fidelity and Schwab,” said Will Trout, head of wealth management at Celent. “We should expect the 'Big Two' custodians to start charging advisors for custody services—I think generally they will start to be a lot more frugal with their advisor networks,” he said. Mike Durbin, president of Fidelity Institutional, recently told editors at a Wealthmanagement.com roundtable that a "not insignificant minority" of advisors who custody with that brokerage firm already operate under a fee-based model.
In hindsight, the rationale behind at least one recent decision at Schwab has become clearer for Trout. Specifically, he points out a move at the firm to cut all access to individual relationship managers for RIAs custodying less than $200 million.
Shirl Penney, co-founder of Dynasty Financial Partners, a platform predominantly for wirehouse exiles now operating in the RIA space, agreed a dominant custodian would put pressure on pricing for high-end wealth management firms. “It will be interesting to see how it fuels further consolidation, which will continue to enhance competition at the high end, and usually competition is good for consumers in terms of services and pricing.”
What’s more, he said that the move could discourage other brokers from entering the RIA custody space, a strategy many of the traditional brokerages have begun pursuing, including Wells Fargo and Commonwealth. “If you’re a large brokerage firm considering entering the custody business, and have a player there with $5 trillion, it will make it very challenging for new entrants.”
But if a deal puts pricing pressure on the upper end of wealth management services, some smaller advisors said they fear reduced competition would slow down innovation in their lane. TD Ameritrade is favored by many smaller advisors as the most nimble and innovative of the four major custodians. That, and its lower asset minimums for RIAs, arguably gave these smaller advisors a leg up.
“I think that generally it’s not good for the industry,” said Daren Blonski, co-founder of Enso Wealth and Sonoma Wealth Advisors. “If it’s less expensive, I think it’s better for the consumers. But I see us [advisors] having less options now. There’s a 200-pound gorilla in the room."
“Generally, Schwab is the big one and they’re a little dismissive of smaller advisors. TD Ameritrade has been supportive of smaller, newer advisors. I hope they retain that,” he said.
Without the pressure of TD Ameritrade nipping at its heels, Schwab may not have the incentive to keep bringing costs down or to continue to innovate for these advisors, who still make up a majority of the independent firms, suggested Tim Welsh, president of consultancy Nexus Strategy.
“We may see a vast malaise sink into the RA custody business, opening the door for innovative, technology-enabled upstarts to disrupt the space,” he said.
“They [Schwab] have prepared for this move for 10 years,” said Alois Pirker, research director for wealth management at Aite Group. Pirker noted how Schwab started calling itself a “full-service” firm in their marketing material a few years ago.
Pirker says the unanswered question would be how Schwab, with a focus on RIAs with over $150 million in assets, would absorb TD Ameritrade's custody business, which caters to advisors further down the AUM chain, typically starting at $50 million. “Can they consolidate? Platforms that are not too expensive, and allows (advisors) to use the technology and integrate it really easily, that is an equation that is hard to pull off.”
Even with a focus on different advisor segments, “there’s a lot of duplication between the organizations,” said Andrew Altfest, president of Altfest Wealth Management, which custodies with both firms. When that goes away, he said, so does the pressure to stay competitive.
And a combined Schwab/TD Ameritrade will easily dominate the RIA market. The RIA custody business is opaque, due to the size, scale and multiple business lines, according to Cerulli Associates' research, but the top four players hold 80% of the estimated $4 trillion. Schwab Institutional has $1.55 trillion in assets under custody, followed by Fidelity with $932 billion, TD Ameritrade with $506 billion and Pershing with $219 billion, according to Cerulli's calculations. "Assets among the largest custodians are already highly concentrated. Any M&A activity among these behemoths will only increase that concentration, reshaping the custody landscape and creating new opportunities to deliver services through economies of scale," said Scott Smith, director of advice relationships for the research firm.
"But keep in mind how other service providers, like Envestnet and Orion, are entering the space to provide alternative options for RIA custody shops with integrated technology platforms that offer everything from account opening and financial planning straight through to portfolio management. So while we are potentially losing one of the larger current competitors, innovation will continue to offer an expanding field of opportunity for RIAs to choose a platform that fits them best," Smith said.
Aaron Klein, CEO of Riskalyze, thinks consolidation could open up opportunities for other players. “One has to think Schwab would plan to migrate all of TD’s relationships onto their platform for efficiencies, but if TD’s RIA clients are forced to repaper accounts, will those advisors make the leap, or are they up for grabs?”
“We probably won’t see any changes for the next year,” said Peter Mallouk, CEO of Creative Planning in Overland Park, Kansas, but called the deal “a milestone event for the industry.”
“It will likely be a little bit bumpy for a while as they try to combine systems and processes … but the end result is going to be fascinating because Schwab will realize serious synergies and remove a competitor that has put pressure on them for the last decade.”
Dynasty’s Penney noted Schwab’s combined market cap will now equal $80 billion, compared with $43 billion at UBS, $80 billion at Morgan Stanley and $77 billion at Goldman Sachs. “Schwab and TD Ameritrade started in 1971 far away from Wall Street,” he said. “Now 50 years later, they are larger than the traditional Wall Street players. There’s something interesting in that.”
Reporting contributed by Erick Bergquist, Patrick Donachie, Asia Martin and Davis Janowski.
