It’s here — another mega-merger.
Morgan Stanley said early Thursday that it is buying discount broker E-Trade Financial for $13 billion in stock, creating a firm that could have over $3 trillion in client assets.
“WOA. Big @WSJ news in financial advisor world this morning – Morgan Stanley Is Buying E*Trade!” said Michael Kitces, popular blogger and planner, on Twitter.
The news comes three months after Charles Schwab said it was acquiring TD Ameritrade for $26 billion. That merger, now going through antitrust review, would potentially lead to a combined firm with $5 trillion in assets.
Kitces and others industry thought leaders discussed a variety of opinions on the deal’s significance for the brokerage, wealth management, workplace and related businesses.
Overall, the consensus view is that this deal is not good news for RIAs as it further limits their choice for custodial services; it’s also bad news for Charles Schwab, seeking to overcome antitrust hurdles associated with its planned merger with TD Ameritrade. The development is, though, good news for Morgan Stanley.
“That’s a business obviously E-trade started a few years ago and I think it’s relatively small,“ Morgan Stanley CEO James Gorman said on a conference call Thursday morning.
“The RIA channel is obviously an interesting channel. It was a referral type program. So that’s something that again obviously wasn’t the primary motivator of the transaction … but we respect, and the RIA business we understand a little bit. And we’ll just play that out over time,” Gorman explained.
RIA Custody, Corporate Stock Plans
“The E*Trade deal brings 5M retail clients and $360B of platform assets to Morgan Stanley. Looks like this is basically Morgan Stanley’s response to rapid growth of Merrill Edge – their own “low-end” small client online brokerage solution (perhaps with call-center CFPs someday?),” Kitces tweeted.
And there’s more.
“It’s not only about the retail opportunity, though. E*Trade also has a big business doing corporate stock plans for companies… which becomes a funnel to E*Trade retail when corporate share lock-ups end and liquidations occur,” he continued.
Last year, E-Trade considered offering corporate-stock-liquidating clients as prospects for big RIAs. “Now, however, it appears more likely that Morgan Stanley is going to try to capture those clients directly, and in fact last year bought Solium which competes in the same corporate-stock-plan space,” Kitces said.
“For advisors, significance is that E*Trade will no longer have referrals for large firms? And may not even remain a custodial RIA platform for small firms… which either way, won’t likely want to affiliate with Morgan-Stanley- owned E*Trade custody & its blatant channel conflict,” he added.
When E-Trade bought Trust Company of America (or TCA) about two years ago, it looked like it would then compete with Schwab.
“In fact, Morgan Stanley acquisition of E*Trade and potential loss of E*Trade Advisor Services as a viable RIA custody competitor puts even MORE pressure on the #Schwabitrade deal,” according to Kitces. “Only a coterie of small-RIA custody options left, and even fewer competitive choices for large RIAs.”
It’s possible E-Trade could spin off the RIA custody operations, but that business would have trouble surviving alone, he adds, noting that RIAs may not accept a custody deal that ties them to Morgan Stanley — leaving the fate of this business unclear.
“Although frankly, that may be WHY Morgan Stanley timed the deal now. They get E*Trade retail to go online downmarket, a crack at its corporate employee stock business to upsell to upmarket wealth management, and ‘collateral damage’ is more DoJ scrutiny of #Schwabitrade now?” Kitces asked.
His conclusion: “Overall, just incredible what a destabilizing effect Schwab’s ZeroCom announcement was last fall. The ripples and reverberations are still being felt. Yet the irony here is that what set up the #Schwabitrade deal may have rippled far enough now to threaten it further? (/end)”
Dynasty Financial Partners CEO Shirl Penney says that in an industry with declining margins, “You can still make money by scaling up via consolidation. There are some revenue synergies with this deal, such as Morgan Stanley ‘upselling’ loans, asset management and other products to E-Trade clients.”
Looking at the corporate finance involved, “It seems like a smart transaction,” he explained in an interview with ThinkAdvisor. “Morgan Stanley stock was up like 25% last year, while E-Trade sold off by about that amount due to [the trend of] zero commissions. It’s an all-stock deal and a strategic acquisition that appears to make sense.”
Gorman, then co-president of Morgan Stanley, helped strike the Smith Barney deal in 2009. “It was brilliant, and this one could be, too,” Penney said, noting that Gorman “is an investment banker.”
It’s the stock-plan piece of the deal that Penney really likes. “These are two of the top companies in [corporate] stock plans,” he said.
According to Morgan Stanley, they would be the industry’s third-biggest player in stock-plan administration after the merger — with about $580 billion in assets and some 4.6 million participants.
“When you think of these plans for executives, even if you get a fraction of that business, it’s a huge win,” Penney said.
The clients can work with client relationship managers for many accounts and with financial advisors on the biggest accounts. “This is big,” said Penney.
On the broader retail side of the business, the wirehouse can “upsell” its model portfolios and other products to E-Trade’s clients, which have some $350 billion in assets.