TD Ameritrade CEO Tim Hockey. The deal could shake things up in the custodial field.

TD Ameritrade Holding Corp. (AMTD) said Monday that it is buying Scottrade Financial Services for $4 billion in cash and stock.

Both discount-brokerage firms have been expanding their work as custodians for RIAs and have a combined $945 billion in retail-investor and RIA-related assets.

The news had been anticipated for several weeks, and comes nearly a year after Scottrade founder and CEO Rodger Riney disclosed he was being treated for blood cancer.

The timing of the TD partnership, though, comes as rival Charles Schwab kicks off its yearly Impact conference for RIAs.

“It looks like they waited to make their noise … and steal a bit of the limelight [from Impact],” said Tim Welsh, president of the consulting group Nexus Strategy, in an interview with ThinkAdvisor, before his flight to the Schwab event in San Diego. “I haven’t seen any firm be as successful as [TD Ameritrade] is now … What a bombshell!”

The deal “makes a lot of sense” from a strategic point of view, according to Welsh, as TD Ameritrade tries to grab market share in the advisor space from Schwab, Fidelity and Pershing. “It’s a segmentation strategy.”

While TD Ameritrade and Scottrade attract advisors with less than $50 million in client assets, Schwab and Fidelity require that the RIAs working with them have this asset level or higher. Pershing, he adds, wants accounts of $250 million and up.

“TD Ameritrade is making a very strategic consolidation play at the bottom of the market by doing this,” Welsh explained. “They can grow and grow and even go after bigger RIAs. Economies of scale are important in this business.”

With rivals insisting on $50 million or more in RIA assets, “This leave the field open for TD Ameritrade to own the bottom half” of the market. And every $1 in custody is very profitable … It’s a brilliant play.”

TD Ameritrade works with about 5,000 RIAs and has over $300 billion in custodial assets, while Scottrade has roughly 1,000 RIA clients.

Earnings and Challenges Ahead

It looks like TD Ameritrade’s financial results going forward could stand some support.

On Monday, it said it net income weakened in the period ending Sept. 30 to $185 million, or $0.35 per share, from $216 million, or $0.40 per share, a year earlier. Revenues fell to $829 million from $831 million.

“With the capital of TD Bank – one of the largest banks in the world – the [combined] firm will have funds to go after bigger advisors,” said Welsh. “But cementing the bottom half of the market is also important – TD probably got Scottrade for a great price.”

The next challenge, of course, will be integrating the two custodial platforms.

“When TD and Ameritrade merged – there was quite a bumpy ride,” he explained, “but now 2016, the skill levels are higher for doing this.”

Still, “They have lots of work ahead of them. Will advisors to be patient enough to go through the inevitable disruption that comes with integration? It’s not easy,” Welsh said.

Nonetheless, TD Ameritrade has won lots of RIA business in recent years “thanks to its service focus,” according to Welsh. “There’s opportunity there for [this] service strategy to help TD grab market share as they’ve done over the last five or six years. And for Scottrade, without a doubt, their advisor clients are better off as part of TD.”