While we may not yet have a sense for its magnitude, the year 2019 will likely go down in history as one of the most significant and impactful for the independent advisory industry. It was shaped by four key developments:
1. The SEC’s refusal to impose the fiduciary standard on broker-dealers, allowing them to operate under a weaker “best interests” standard and still claim some sort of equivalency with fiduciary-bound independent advisors;
2. The acquisition by Goldman Sachs of United Capital, signaling a new level of direct competition against and within the independent advisory community not only by Goldman but also by others seeking to compete in the space;
3. The unprecedented push by private equity investors to fuel a new class of firms set on disrupting the industry, partly by driving valuations to unprecedented levels; and
4. Following their moves to eliminate certain commissions, the decision by one industry titan, TD Ameritrade, to be acquired by another, Charles Schwab.
One can easily argue that each of the first three developments taken alone—and all of them taken together—bode poorly for many independent investment advisors. But what about the last development, the Schwab-TD Ameritrade deal? This article offers the case for and against the merger from the specific perspective of RIAs, which represent the bulk of the independent advisory industry.
The Facts Of The Case
The news that Schwab and TDA were in talks broke on November 21. On November 25, the companies formally announced the deal. Schwab would acquire TDA in an all-stock transaction valued at approximately $26 billion. Schwab’s press release indicated that, after the transaction closes in this years second half, the combined firms would operate under the Schwab name and serve about 24 million client accounts with over $5 trillion in assets.
Reports suggested that after the acquisition Schwab would control as much as 70% of all RIA custody business, with Fidelity, Pershing, State Street, TradePMR, E*Trade, Raymond James and others squabbling over the rest. Schwab’s Advisor Services website indicates that it already provides services to 7,500 independent advisors, and TDA said it currently works with as many as 7,000 RIAs.
There is, of course, overlap, as many RIAs use both companies. To put things into perspective, Fidelity, which will now be a distant second in the RIA custody race, says it has only 3,900 clients on its Fidelity Clearing & Custody Solutions platform and they include not only RIAs but also banks, broker-dealers, family offices and wealthy families.
Why The Merger Is Good For RIAs
1. It means better service, technology and resources.
As is the intention with most of these deals, the merger of Schwab and TDA should lead to a new iteration of Schwab that is even better than the old one, as the firm’s merged leadership teams seek to capitalize on the best that each of the legacy firms has to offer. In turn, advisors and their clients would benefit from better service, technology and resources.
Just consider what a technology platform made from this combination could look like in a few years—or the combined trust services, charitable planning, practice management and consulting businesses. Perhaps with the addition of TDA the new entity will also offer even better, more accessible service to international clients. And there’s always the potential to bring Schwab Bank to the next level.