Charles Schwab Corp.’s acquisition of TD Ameritrade Holdings means there’s one less discount brokerage firm to choose from — and, experts say, one more reminder that consolidation can have consequences for average investors.
Schwab SCHW, +1.22% on Monday announced its $26 billion acquisition of TD Ameritade AMTD, +0.98% in a deal that will create a brokerage behemoth with 24 million brokerage accounts and more than $5 trillion in assets.
But at a time when trading fees are falling away, bigger might not necessarily be better.
Get ready for possible cross-selling
“Any company, when you get to this size, is incentivized to push and move investors in the direction that’s most profitable, because they are a business,” said Lance Roberts, chief investment strategist of RIA Advisors, based in Houston, Texas.
Roberts emphasized he wasn’t criticizing Schwab if it tried to cross-sell self-directed investors on other services. All sorts of companies would do the same, he said.
Investors can prep themselves for that potential cross-sell — meaning, selling an additional product to an existing customer — by being clear on what money moves are best for them, Roberts said.
That’s especially important with a bear market looming at some point, he noted.
“As a retail investor, you’ve got to take some responsibility for your own money,” he told MarketWatch when reports of the possible merger first surfaced.
The deal is expected to close in the second half of next year and company integration will follow; until then, it’s business as usual for customers on both platforms, according to an explainer on the deal from TD Ameritrade.
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The acquisition comes less than a month after Schwab, TD Ameritrade and E- ETFC, +1.18% entirely erased their trading commissions in an ongoing battle to supply ever-cheaper investor costs. At that time, Schwab officials estimated the scrapped commissions were equivalent to $90 million to $100 million in quarterly revenue, which comes to 3-4% of the company’s total net revenue.
An uptick in cross-promotion of robo-products?
If Schwab absorbs TD Ameritrade’s own zeroed-out commissions, it might have to make up the difference in other ways, observers told MarketWatch after initial reports of the possible merger.
Retail investors playing the market by themselves could see “an uptick in cross promotion of robo-products” like the automated Schwab Intelligent Portfolios, said Jen Butler, director of asset management and brokerage research at Corporate Insight, a market research firm.
“It remains to be seen how these robo-accounts endure a bear market,” Butler said, speaking generally about all algorithm-driven investment accounts. Some automated accounts mix in real-life advisors — like Schwab Intelligent Portfolios Premium — but others don’t.
Computer calculations might be cold comfort whenever a downturn occurs, Butler said. “You want to turn to someone, not just an algorithm,” she said.
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Another potential result of a merger could be Schwab trying to market self-directed investors to hook up with the registered investment advisors who use Schwab as its custodian, she said. (Custodians hold the advisors’ assets and execute trades on their instructions for a fee.)
Potential cross-sells fit a wider trend where financial firms are trying to be involved in every aspect of an investor’s financial life, Butler said.
Roberts agreed self-directed investors needed to be ready for more cross-sells. Lower investing costs are a great potential upside, he said. But fewer choices could have a downside, he added.
“You’re taking more independence out of the market. It gives investors less choice in how to manage their money,” he said.
A ‘unique opportunity,’ says Schwab, but investors should ‘question the benefits,’ says rival Fidelity
On Monday, Schwab and TD Ameritrade executives said the deal would benefit investors with a broader array of products and services.
“With this transaction, we will capitalize on the unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution that will be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys,” Schwab’s president and CEO, Walt Bettinger, said in a statement.
Stephen Boyle, TD Ameritrade’s interim president and CEO said the company, now combined with Schwab, “can deliver the ultimate client experience for retail investors and independent registered investment advisors. We can continue to challenge the status quo, pooling our resources and expertise to transform lives — and investing — and deliver sustainable, long-term value to our many stakeholders.”
But one of its rivals, an executive at Fidelity Investments FNF, -0.91%, said the Schwab-TD Ameritrade merger could end with downsides for customers at the newly-merged firm including increased back-end costs on trades that would outweigh zero-fee trade commissions.
“Investors should seriously question the benefit of a combined Charles Schwab and TD Ameritrade,” said Kathy Murphy, president of Fidelity’s Personal Investing business, later adding, “We are confident there is no competitor that can match our value proposition while also making extensive investments back into the business.”
Fidelity noted it had $7.8 trillion in assets by the end of September. A Schwab spokeswoman declined to comment on Fidelity’s response.
Regulatory issues?
Professor Lawrence White, who teaches on antitrust matters at the New York University Stern School of Business, doubted much more cross selling would occur because companies like Schwab and TD Ameritrade already had strong incentives to do that now.
But he said federal regulators would in all likelihood take a very close look at the deal to see if there were any antitrust problems that could harm consumers in the end. White noted he was “agnostic” on whether the answer was yes or no.
But another observer doubted antitrust regulators would get involved.
In a note released before the deal’s announcement, Devin Ryan, senior capital markets analyst at JMP Securities, an investment banking and asset management firm, said the Schwab-TD Ameritrade deal would “still represent a small percentage of the overall investable wealth market in the U.S. which they are going after.”
Ryan said consumers have been benefitting. “The market is quite fragmented across the spectrum of products and capabilities, and we would also note that the consolidation has driven pricing dramatically lower for customers and at the same time driven the quality of their experience up substantially.”
Shares of Charles Schwab Corp. are up more than 17% since the start of the year. Shares of TD Ameritrade are up 4.5% in that time. The S&P 500 SPX, +0.42% is up almost 25% and the Dow Jones Industrial Average DJIA, +0.15% is up 20% year to date.
This story was updated on Nov. 25, 2019.