images of Schwab and TD Ameritrade signs (Photos: Shutterstock)

Charles Schwab received lots of good news last week, with the Justice Department and shareholders approving its $26 billion merger with rival TD Ameritrade. 

The firms, which collectively work with more than 10,000 RIAs and $5 trillion, should come together by year-end. The technology and related integration, though, requires 18 to 36 months.

The industry was “pretty much expecting this outcome, so it’s not a big surprise to anyone,” said Tim Welsh, head of the consultancy Nexus Strategy. 

“However, it does remove uncertainty, so we expect to see RIAs affiliated with TD Ameritrade ramp up their search and inquiries for a new custodian, particularly smaller firms who fear a lower service level and less personalized support at the combined Goliath,” explained Welsh, a Schwab veteran himself.

But what impact could the huge deal have on advisors and other industry players over the next year or two and beyond? As the merger moves ahead, executives and industry watchers gave their “big takeaways” on its significance. 

‘Evolving Marketplace’ 

Most midsize and large RIAs will likely move to Schwab from TD Ameritrade, with others likely to go elsewhere, according to Joel Bruckenstein, head of Technology Tools for Today, or T3.

Custodians have a hard time making a profit through services provided to RIAs with around $100 million or less in client assets, given low interest rates and zero commissions, Bruckenstein and others say.

“But what you see in this industry is that a vacuum usually gets filled,” the industry veteran said in an interview. 

Interactive Brokers, Shareholder Services Group and TradePMR, for instance, are “beefing up” their offerings, he pointed out. 

“And LPL Financial should get into the RIA space in a big way,” Bruckenstein explained, adding that newcomer Altruist is also moving to capture part of the business. 

Has Schwab won the war within the RIA industry? “It’s an evolving marketplace, and it’s too soon to tell. Changing attitudes at firms and technology innovation will influence this,” he said.

“All custodians are saying their pipelines are full, and they are happy,” Bruckenstein added. “I do think Schwab can convert the vast majority of the business [from TD Ameritrade].”

The ‘Upsides’

Since the Schwabitrade deal was announced in November, antitrust concerns have been raised by advisors and others. But, as Bruckenstein and others point out, there’s been more activity from small players, too.

“This is ultimately good for most RIAs,” said Chip Roame, head of Tiburon Strategic Advisors. 

“Sure, many pundits will simply say that Schwab will eliminate TD Ameritrade as a custodian competitor,” Roame explained, “but I have a few problems with that simple conclusion.”

Schwab is “an innovative company,” the consultant says, meaning that it likely will roll out more products and services.

The expected loss of TD Ameritrade as a custodial choice has generated new competitive offerings in the broader market, including some from retail-focused firms like Acorns, Roame says.

There could be further shakeup in the industry with Morgan Stanley acquiring E-Trade and Goldman Sachs buying Folio Financial, he points out. 

In addition, “Vanguard has made noise about reentering [the market] as a custodian,” Roame said. “And independent broker-dealers like LPL and Raymond James have custodial offerings now.”

There also are turnkey asset managers like Envestnet and robo-advisors like Betterment “pushing more into this space,” according to Roame. 

And, of course, there’s the behemoth Fidelity, “which certainly won’t sit still, is super well-capitalized and may benefit more than any other firm” from the Schwabitrade deal, he adds. 

All these dynamics, Roame concludes, “raise the competitive landscape.”

Emerging Players

Others agree with Bruckenstein and Roame’s outlook on the changing dynamics of the custodial sector. 

“There’s an element that tends to get overlooked,” said Gavin Spitzner, head of Wealth Consulting Partners. “It’s not only Schwab, Fidelity and Pershing. There are a number of fast-growing TAMPs that offer a bundled custody solution as well.”

With the Schwab-TD Ameritrade consolidation, the industry should see more innovation, Spitzner adds, “and a preference by some smaller RIAs to go to other niche players such as upstarts like Altruist.”

The concern of advisors, according to recruiter Jon Henschen, is that the merger of Schwab and TD Ameritrade may push out smaller RIAs.

Plus, these RIAs fear that cost cutting could be “the primary driver, which has the potential of gutting the qualities that originally drew them to TD Ameritrade,” Henschen said. 

“If Schwab can utilize its scale to simply bring more to the advisors and not take away, that would be ideal,” Henschen explained.

One advisor, Pamela Sandy, CEO of the Cleveland-based advisory group Confiance, summed up her concerns on Twitter when the Justice Department’s approval of the deal made headlines: “That’s too bad. I’m happy using TD as my custodian. TD is a great firm, and we need competition not mergers.”

Opening Doors?

“This is actually a huge opportunity for us,” said Steve Sanders, head of marketing and product development for Interactive Brokers.

“Larger firms tend to lose focus, especially on small and medium-size firms,” Sanders said. Plus, some big firms compete with individual advisors with their own advisors.

“Can you really be fair to both sides?” he asked. “And if they have their own products, which they may push, that may not be in the best interest of advisors and clients.”

Interactive Brokers says its appeal is especially strong with advisors starting a new venture or former traders moving into advisor work. “We make it easy to move over to us,” Sanders said, adding, “It’s a very exciting time to be in the business.”

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