(Photos: Bloomberg/Shutterstock; Image by Chris Nicholls/ALM)

The Department of Justice is calling a large number of RIAs and professionals working with RIAs, and that’s raising broader questions about what will happen to the $26 billion Charles Schwab-TD Ameritrade merger. 

The calls are part of the second request in the discovery procedure staged by the DOJ’s Antitrust Division, which is charged with reviewing mergers and acquisitions that could have anticompetitive results.

“A second request is typical for a deal of this size, and we are not surprised the government would ask for more information and time to review it,” according to a statement from Schwab, which remains upbeat on the deal’s approval.

Not so fast, some industry sources say. “There are many advisors and others who think this deal would be terrible for investors and for RIAs,” said Tim Welsh, head of Nexus Strategy, a consulting firm. 

“It’s really no shoo-in,” Welsh explained. “The odds against it have gone up quite a bit.”

The merger would unite about 14,000 of the country’s 20,000 RIAs, he says, adding that some of these 14,000 RIAs use more than one custodian. 

Schwab has an estimated 50% market share as an RIA custodian; TD Ameritrade’s is roughly 15% to 20%, and Fidelity has about 25%.

“We continue to believe the transaction will be beneficial to investors and to the registered investment advisors who serve them … ,” Schwab said. “The industry is, and will remain, dynamically competitive, and we believe combining our two companies will give us the opportunity to enhance our services to all of our clients, including individual investors and RIAs.”

The deal was discussed by officials and advisors extensively at TD Ameritrade Institutional’s recent National LINC event in Orlando, Florida. Before, during and after the RIA conference, the DOJ was contacting advisors to arrange calls about it. 

And one week later, Schwab CEO Walt Bettinger pledged it would not impose asset minimums or custody fees on small RIAs and has “no intention to raise them.” 

RIA Issues

While there’s plenty of competition on the retail or DIY investor side of Schwab and TD’s businesses, it’s the RIA side — which is more like an oligopoly — that has caught the DOJ’s attention.

With so few players in the RIA space, the loss of one party “means prices are going to go up for the advisor and/or the end client and service is going to go down,” said Ryan Hughes of Bull Oak Capital.

Hughes says he isn’t holding his breath that the DOJ will block the merger. “When was the last time a merger got blocked?” 

While the DOJ just approved the $26 billion tie-up of T-Mobile and Sprint, it did block Novelis’ proposed purchase of Aleris in September to “preserve competition in the North American market for rolled aluminum sheet” used to make cars.

For its part, Schwab insists the transaction “will be beneficial to investors and to the registered investment advisors (RIAs) who serve them.”

What does it take to become a custodian for RIAs? About $15 million to get the regulatory and other structure in place, Hughes says, along with product knowledge and a fairly robust offering of products and services.

The three pillars of offerings for RIAs, says Welsh, are technology, service and advocacy. The deal is likely to stifle innovation and downgrade service (especially to smaller RIAs), he says. 

“How can you justify spending money [on service] without the corresponding revenue stream?” he asked. As a result, some advisors could be pushed to call centers, where wait times “could go as long as, like, 58 minutes,” Welsh said. 

As for RIA advocacy, Schwab “is not likely to be a cheerleader” for smaller advisors, he added. 

What’s Next

It’s possible the government could ask Schwab to spin off TD’s RIA business or to sell it, the consultant says. 

“This is not a slam dunk,” Welsh said. And if the merger falls through, TD is owed about $1 billion. “The stakes are beyond normal.”

Schwab “continue[s] to cooperate fully with the DOJ in its review,” the firm said. “We continue to expect that the transaction will close in the second half of 2020. Planning for the integration will continue.”

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