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Schwab: TD Ameritrade Integration Costs Higher Than Expected

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What You Need to Know

  • Schwab says the extra costs are due to changes in trading volume and its work toward improving the client experience.
  • The firm now expects to complete the integration at the high end of its forecast, within 30 to 36 months.
  • It also said it would wait for more regulatory clarity before offering any crypto products.

Charles Schwab expects the integration of TD Ameritrade into its business to cost about $400 million to $600 million more than originally expected, at $2 billion to $2.2 billion, Joe Martinetto, Schwab senior executive vice president and chief operating officer, said Thursday during a spring business update.

Meanwhile, the firm says it’s open to offering cryptocurrency products but is waiting for more clarity on the regulatory front.

Schwab now expects the TD Ameritrade integration to cost more than the $1.6 billion originally expected due to the “increase in scope” that is planned, according to Martinetto.

“Roughly half the increase” now expected in the integration budget has been “driven by the volume changes alone” in trading over the past few months, he explained. “The remainder is the additional work” that has been done to “provide a superior client experience and mitigate some of the future risk to our service platform,” he said.

Since Schwab first announced its planned acquisition of TD Ameritrade in November 2019, it has seen tremendous growth in client volumes, company executives said Thursday. While active brokerage accounts are up by 25%, daily average trades and peak daily trades have quadrupled, according to the company.

“While our original deal model assumed we would need capacity at integration for 12 million trades, we exceeded that level in Q1, with a daily high of 12.3 million trades,” a Schwab spokeswoman said.

“To address these new dynamics, we have expanded the scope of our integration plans, with a focus on three areas,” she explained to ThinkAdvisor. They are: “Ensuring the scalability and resiliency of our tech infrastructure, including taking steps to manage spikes in trading volume on a single platform; introducing new features and capabilities to ensure the smoothest possible experiences for new clients; and automating certain operations in order to handle increased volumes without creating large backlogs.”

Schwab also now projects the completion of the integration will be at the “long end of our initial time frame and we now expect to complete conversion within 30 to 36 months” as a result of the increased scope of the project, Martinetto said.

The integration was initially projected by Schwab and TD Ameritrade to take 18 to 36 months. Industry experts had told ThinkAdvisor they expected the full integration to come in at the higher end of that projection.

On the plus side, revenue from TD Ameritrade has been “substantially higher” than Schwab had expected “as a result of the higher volumes,” Martinetto said on Thursday. At the same time, the long-term revenue of the TD Ameritrade business has increased also, he added.

The company also now expects the total revenue synergies of the merger with TD Ameritrade to reach $4.3 billion to $4.8 billion, up $800 million from Schwab’s original estimate, he added.

Schwab finalized its acquisition of TD Ameritrade Oct. 6. The firm started the process of integrating the Schwab and TD Ameritrade advisor referral networks this week as part of an initiative that will result in a decrease in the number of participating RIA firms to 175 from 298, Schwab said on Wednesday.

Crypto Plans

“We are looking very closely and, I think cautiously, at the crypto market,” Walt Bettinger, Schwab CEO and president, told analysts and reporters. “We can certainly see some of the client excitement” about crypto, “particularly with certain segments of the market, and I would expect, as greater clarity is recognized potentially by regulators, that we would consider offering capabilities in the crypto space,” he said.

If the firm “decides to participate in the crypto market, we will be highly competitive, we will be disruptive and we will be client-oriented,” he said. However, he stressed that it “would be important” for regulators to provide more clarity “before we would consider offering a retail-type trading experience on crypto.”

For now, “there are ways to invest in crypto today, some of which are available in a derivative basis through Schwab,” he pointed out.

Schwab is, for now, “keeping our eyes closely on whether there will be investment-oriented product — whether it be ETF or others — that will be delivering crypto investing to a larger part of the market than can get it today via some of the funds that are out there,” he said.

If that regulatory clarity comes, “you can expect Schwab to be a player in that space in the same way it has been a player in other investment opportunities across the spectrum,” he added.