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The History of the Schwab-TD Ameritrade Deal

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The roots of Charles Schwab and TD Ameritrade go back decades to when Toronto-Dominion Bank of Canada merged its operations in 1955.

That development came some 36 years after Dominion Bank started its U.S. operations (in 1919) and also eight years before Charles Schwab launched an investor newsletter with two partners (in 1963).

The actual coming together of Schwab and TD Ameritrade, though, seemed to have been set in motion on Sept. 26, 2019, when Interactive Brokers said it would soon drop trading commissions in the hopes of grabbing market share from bigger rivals that quickly followed suit, and from new rivals like Robinhood that had cut them years ago.

A look back at the brokerage industry’s history — as we shown in our detailed timeline of the megadeal — makes it clear that earlier mergers and acquisitions have been a critical part of its development, along with many other factors.

First, a few facts: Charles Schwab’s final purchase price was $22 billion, $4 billion less than the figure announced on Nov. 25, 2019.

Shares of both companies dropped about 20% from Jan. 1 through Oct. 5 — the last day of trading for TD Ameritrade stock — while the S&P 500 improved over 4% during the same period. As of Oct. 30, Schwab’s shares were down 3.6% in 2020 vs. a 1.2% rise in the S&P 500.

As a combined entity, Schwab and TD Ameritrade — which will maintain separate broker-dealers for 18 to 36 months after the official deal’s closing — have over $6 trillion in client assets.

That puts it in the same league, although somewhat behind, Fidelity with $9 trillion ($3.5 trillion of which is in discretionary assets), BlackRock with $7.3 trillion and Vanguard with $6.6 trillion.

The total assets handled by Schwab and TD Ameritrade Institutional’s registered investment advisor, or RIA, clients is about $2.6 trillion — of which $1.9 trillion is at Schwab and $700 billion at TDAI.

Rival Fidelity Institutional had $3.2 trillion in assets under administration for its dual clearing and custody clients as of June 30, including some large non-RIA clients such as banks and broker-dealers. It doesn’t report its assets by segment (such as advisory), but says it works with about 3,000 RIA firms.

BNY Mellon Pershing has about $850 billion in advisory assets and roughly 725 RIA clients.

The Scene a Year Ago

When reports of a possible tie-up began to circulate on Nov. 21, 2019, Carson Group CEO Ron Carson said he was not surprised “at all” by the development.

“The profession is beginning to realize we don’t need 50,000 trading departments, research departments, marketing departments or compliance departments,” Carson explained.

News of the possible brokerage megadeal came a week after the Advisor Group network of broker-dealers moved to buy rival Ladenburg Thalmann in a deal that involved up to 11,500 advisors and $450 billion in assets.

The Schwab-TD Ameritrade transaction “is the biggest deal of the year and speaks volumes to how we’re on the eve of going from a traditionally inefficient industry to one that is more streamlined,” Carson said in late 2019.

“In general, the management of companies like these, often led by some pessimistic CEOs, might look at the financial markets going forward and say, ‘It’s now or never. We won’t get a better price if we wait,’” said recruiter and industry veteran Jon Henschen last November. “It’s all market timing, as with Advisor Group-Ladenburg, and profitability.”

Industry trends, which added costs and brought related pressures to discount brokerages, meant “it was going to be a struggle for TD to stay in the game,” Henschen explained. “So the options were to sell now with the markets being ‘toppy’ or keep going with hard-to-maintain profits. Then zero commission nipped it in the bud.”

In its announcement on Nov. 25, 2019, Schwab said the deal potentially unites more than 14,000 RIAs, some $5.1 trillion in investor and advisory assets, and 24 million accounts. The two firms’ combined yearly revenue was estimated at $17 billion with pre-tax profits of $8 billion.

This news of the biggest deal to hit financial services in decades came just seven weeks after the main discount brokerage firms dropped commissions to zero.

It also broke about two years after TD Ameritrade wrapped up its purchase of rival Scottrade (on Sept. 18, 2017) and Tom Bradley — then head of both RIA and retail operations at TD Ameritrade — departed. (That deal was first announced on Oct. 24, 2016).

The new entity aims to “capitalize on the unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution,” Schwab President and CEO Walt Bettinger said in a statement a year ago.

“A new chapter for me … best of luck to my colleagues at TDAmeritrade,” Hockey said on Twitter at the time. “Life is like a bike trip. There are many twists and turns. The idea is to enjoy the ride…and as Einstein said, you only stay upright if you keep moving forward!”

Summing up what many advisors and industry watchers were thinking a year ago, RIA George Papadopoulas explained in a tweet: “Let’s face it, Schwab is a hell of a competitor! They managed to flat out corner TD Ameritrade, whose executive team could not manage to transition the company away from relying so much on trading commissions. And then they went for the kill!”

Evolving RIA Matters

Just a few weeks after Schwab announced the deal in late 2019, it hired former-TD Ameritrade executive Bradley to lead Advisor Services to oversee custodial services for RIAs with up to $100 million in assets and to help integrate the two firms’ advisor-services businesses.

“Woa. BIG industry news! Schwab hiring former TDA Institutional pioneer Tom Bradley to lead its “Core” <$100M AUM segment,” said popular blogger and planner Michael Kitces on Twitter last December. “Should be a big relief for small RIAs fearing Schwab will abandon them. (Unclear how far below $100M Schwab will go, though?).”

Kitces continued: “For “smaller” (<$100M) RIAs that have been fearful that Schwab would shut the door on them after the #Schwabitrade merger closed, this should be a huge relief. Schwab isn’t hiring @TomBradley_USA to abandon small RIAs. It’s hiring Bradley to build with small RIAs.”

Bradley spent three decades at TD Ameritrade, including about five years as president of the firm’s Retail Distribution unit and 12 years as head of its Institutional business.

“We’ve known Tom personally for years, and have long admired his successful track record working across the investment services community,” said Bernie Clark, head of Schwab Advisor Services, in a statement at the time.

Bradley now reports to Clark and is based at Schwab’s campus and soon-to-be headquarters in Westlake, Texas (near Dallas). “There couldn’t be a more exciting time to join Schwab,” he said when his hiring was announced.

“I cannot emphasize enough how encouraging this news should be for the smaller/younger financial advisor crowd. Tom Bradley is a wonderful guy, cares deeply about the future of this profession,” tweeted Ritholtz Wealth Management CEO Josh Brown a year ago.

Still, the new role won’t be a walk in the park, cautioned Tim Welsh of the consultancy Nexus Strategy: “The challenge for him with this new gig will be that small RIAs will not be a priority for the overall custody business, simply because of the lack of potential for monetizing small accounts.”

In fact, being able to make the business case for more resources to support this segment might fall on deaf ears, thus creating frustration and potential backlash, according to Welsh. “But if anyone can do it, it is Tom Bradley!” he added.

Schwab insisted at the time that it’s been working hard on services for RIAs with under $100 million in client assets. These efforts include virtual business consulting, online events, an almost 50% cut in pricing for electronically traded transaction-fee mutual funds and Portfolio Connect, a free portfolio management system for advisors using its custody services, the firm says.

“We are building a more modern service model, one that will adapt to the needs of the firms we serve, regardless of their size,” according to Clark.

As Kitces pointed out in a tweet at the time of Bradley’s hiring, “Of course, there are a LOT of smaller RIAs at TD Ameritrade today specifically because they got rejected by Schwab’s AUM minimums in the past. Which left a bad taste in a lot of mouths. That won’t instantly vanish just because Schwab says, ‘Ok, NOW we’ll work with you!’”

He added: “The bottom line, though, is that Schwab’s hire of @TomBradley_USA is a big deal, not just for his experience to build/scale w/ <$100M RIAs, but also strategically to soothe the nerves of TDA RIAs. What a monster win for Schwab. Now we just have to wait to see execution? :)”

Looking more broadly at the situation for RIAs, “I see two camps forming,” said Gavin Spitzner, president of Wealth Consulting Partners, after the deal’s announcement. “One, for those now with TD Ameritrade expressly not to be with Schwab, will use this as a reason to migrate away to an established firm or potentially an upstart like Altruist.”

The second camp could see the combination as having extra resources to invest in innovation and “doesn’t care about the competitive angle of their custodian competing alongside them in the wealth business and might grumble but will stay,” Spitzner explained. “Most interesting will be the ripple effects and who acquires or merges with who coming out of this.”

Technology Worries

Culturally and with respect to technology, the consultant points out, there are differences between the two firms: “I doubt their systems are fully compatible. That will be a challenge.”

While TD’s Veo has over 170 integrations with third parties, he said, “Schwab only has a fraction of that number. What does that mean for third-party vendors? Some will likely be frozen out.”

TD Ameritrade’s culture and technology have been impressive to advisors, according to Henschen. “What will happen to this technology? Will Schwab integrate some of it [for its advisors] and keep it the same for those [coming over] from TD?” he asked late last year.

That’s been “the” question on the minds of many advisors since last November. They got some clarity in January when TD Ameritrade Institutional President Tom Nally said integration of the two companies’ technology and operations is expected to take two to three years after the transaction closes.

“This is a large deal and combining these two firms is going to take time — especially if you want to do it right, and that’s what we’re focused on,” Nally told more than 3,200 RIAs and others on Jan. 30 during TD Ameritrade’s 24th-annual National LINC 2020 conference in Orlando, Florida. (LINC has been cancelled for 2021.)

“We’re playing the long game,” he said, adding: “We’re not looking to put quick wins up on the board. We’re looking to be very thoughtful and very methodical about how we do this to bring both of these organizations together.”

Then (like now), “We don’t know” the fate of TD’s Veo One next-generation advisor platform after the merger is completed, Nally conceded. The legacy Veo platform, though, is about 15 years old and does “need to be retired,” Nally said.

The firm told advisors that it aimed to complete the process of upgrading all firms to Veo One and “to make the transition as smooth as possible, advisors will make the move to the next-generation platform in waves over the coming year.”

One piece of news that drew applause from the audience at LINC 2020 was Nally’s announcement that “for the vast majority of accounts, you will not have to repaper” as a result of the merger. Noting that he’s been through about eight deals with TD Ameritrade, he explained that he never saw the firm having to repaper because “everything gets done through negative consent.”

The company is “going to try and do as much of this as we possibly can electronically, so we don’t have to stuff your clients’ mailboxes with paper,” although it would be helpful if advisors could get their clients to sign up for digital document delivery, Nally stated.

At the event, Joel Bruckenstein, president of Technology Tools for Today, said he spoke to “quite a few advisors” who like the open-access approach of the Veo One platform and “believe that TD’s tech is superior” to that of Schwab.

Concerning Schwab’s purchase of TD Ameritrade, Bruckenstein said during a panel discussion: “If some of the TD technology were to go away, it would be a lot more disruptive to your firms than you are admitting to yourselves.”

This is because “everything from the way they buy and sell to the way their workflows are — they’re not the same. And so, your back-office ninjas are going to have to learn some new skill sets. And that’s going to be disruptive and it’s going to take some time,” he added.

In particular, the “openness that TD has to those ‘bleeding-edge vendors’” could be negatively impacted by the Schwab deal, he said at the conference, and that might stifle industry innovation among startups.

As the transaction moved closer to completion in early August, Schwab shared some details on how it plans to integrate TD Ameritrade’s technology into the combined entity, which received mixed reviews.

TD Ameritrade’s thinkorswim and thinkpipes trading platforms, educational resources and tools will be part of what Schwab offers clients of RIAs and other investors following its acquisition of the former rival. It also plans to keep TD Ameritrade Institutional’s portfolio rebalancing solution iRebal.

Schwab’s plan is “definitely a win for TDA advisors, as those assets were truly differentiated from TDA’s superior technology offering vs. Schwab,” Tim Welsh, head of the consultancy Nexus Strategy said at the time.

“However, as history has shown, nothing ever goes smoothly in a technology integration, so the disruption from the massive merger for advisors will be real,” Welsh added. “Will they stick around and muddle through it? That is the $26 billion question.”

Meanwhile, Bruckenstein called Schwab’s plan to keep thinkpipes and thinkorswim a “good move” on Twitter. (The thinkpipes platform features real-time charting and efficient trading and allocation.)

But Spitzner called Schwab’s announcement “non-news news in the sense that I can’t imagine Schwab saying anything other than they’re going to maintain thinkorswim and other legacy TDA solutions.”

Schwab seemed to be “simply saying they’re retaining both legacy trading platforms — thinkorswim and Schwab’s StreetSmartEdge — and they’ll figure out how to integrate later.”

The consultant explained, “They’re not going to tell either set of existing users they’re shutting down their platform. Instead this freezes the market and kicks the can down the road … . The tougher work is ahead because, of course, long-term it doesn’t make sense to maintain two separate, but similar, capabilities.”

Since November when the acquisition was announced, Schwab said it “would carefully evaluate the existing technologies from each firm as part of a single, unified, world-class platform that combines the great capabilities, education and service clients enjoy at both firms,” according to a spokesperson.

“We are committed to leveraging material advantages in TD Ameritrade’s platforms when doing so enables us to deliver a differentiated experience to all of our clients. That commitment drove this decision,” the firm added in a statement. As Bradley explained earlier in the year, Schwab’s plan is to “come up with a best-of-breed platform.”

Executive Departures

Who gets to influence the full integration of technology and operations over the next 18-36 months, i.e., through April 2022 at the earliest and October 2023 at the latest? The cards have been dealt and, as some observers expected, Schwab executives have ended up with the winning hand.

On Oct. 9 — about two months after Schwab announced its technology plans and three days after it closed the transaction — it explained that the 19-member Schwab Executive Council, which includes CEO Walt Bettinger and Chairman Chuck Schwab, would lead the firm.

“As result of these decisions, the following members of TD Ameritrade Senior Operating Council (SOC) will be leaving the company,” according to a memo.

These executives are:

• Steve Boyle, interim president and chief executive officer;

• Prashant Bhatia, managing director, Enterprise Strategy & Corporate Development;

• Peter deSilva, president, Retail;

• Karen Ganzlin, executive vice president, chief human resources officer;

• Spyro Karetsos, chief risk officer;

• Tom Nally, president, TD Ameritrade Institutional;

• Steve Quirk, executive vice president, Trading and Education; and

• Vijay Sankaran, chief information officer

“These respected professionals have played an important role in TD Ameritrade’s remarkable achievements and demonstrated a deep commitment to the success of this transaction,” Schwab added.

The TD Ameritrade senior executives joining Schwab, according to a report in RIABiz, are:

• Kim Hillyer, managing director of Corporate Communications;

• James Kostulias, managing director of Integration Office;

• Lee McAdoo, managing director of Business;

• Jon Peterson, interim chief financial officer; and

• Andrew Yolin, interim chief marketing officer.

In July, Dani Fava — then head of innovation for TD Ameritrade Institutional — left the firm and became head of strategic development for Envestnet.

In August, Skip Schweiss, managing director of Retirement Plan Solutions and Advisor Advocacy for TD Ameritrade Institutional, also departed.

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– Jeff Berman contributed to this report.