Less than two months after slashing commissions to zero, Charles Schwab reportedly has a tentative agreement to buy TD Ameritrade for $26 billion. The news, which was not confirmed, was first reported by Fox Business.

It wasn't clear if the acquisition would face antitrust issues. Schwab is believed to garner nearly 50% of all independent RIAs' custodial business, an activity that generates 40% to 50% of operating income for many discount brokerages.

TD Ameritrade's market share is estimated to be over 15%, so the merged entity would enjoy a dominant position of 65% or more. Many RIAs use both Schwab and TD Ameritrade, but those who use TD only might seek to re-evaluate their options.

After Schwab jettisoned commissions on October 1, TD Ameritrade was the first discount brokerage to match its offer later that day. The stock prices of both firms plummeted but TD took a bigger hit that probably made it a more attractive target for Schwab.

In pre-market trading this morning, TD shares climbed about 25% while Schwab shares rose more than 7%. A combined firm would have about $5 trillion in assets and a market capitalization of close to $90 billion.

The decision to dump commissions gave Schwab an advantage as commissions represented only about 4% of its revenues. At TD Ameritrade, commissions accounted for about 20% of revenues.

For RIAs, the acquisition would eliminate a major choice among custodians. Schwab is the leading RIA custodian but Fidelity and TD rank second and third, followed by Pershing Advisory Solutions and E*Trade. A combined Schwab-TD entity might be able to offer more services for RIAs but it could also create opportunities for other players.

By ditching commissions, Schwab effectively has decided to focus on asset gathering by charging inexpensive subscription fees. That is likely to provide more competition for RIAs who are focused on America's sprawling mass affluent population.

In recent years, executives in Schwab's retail division have acknowledged they frequently lose clients to RIAs once the individuals' assets reach $1.5 million to $2 million. Earlier this year, Schwab relieved the head of its retail division in a corporate reorganization.

TD entered the RIA custodial business in the late 1990s by establsihing itself as a friendly home for small RIAs. In the last two decades, however, it has invested heavily in technology and that allowed it to attract some of the nation's RIA giants, including Creative Planning and Edelman Financial Engines.

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