Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
ThinkAdvisor
Charles Schwab and TD Ameritrade signs

Industry Spotlight > Mergers and Acquisitions

Why Advisory Assets, Retail Clients Are Leaving Schwab

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Schwab is experiencing lower net flows of client money, it disclosed this week; it says the decline is temporary.
  • Some of the attrition can be chalked up to TD Ameritrade retail clients having accounts at two firms and shifting away from Schwab.
  • As the TDA advisor migration enters its final stages, Schwab is dealing with the most diffcult advisors to move, which is typical, says Alois Pirker.

The report Monday from Charles Schwab Corp. of lower flows of client money as it integrates TD Ameritrade into its business was not surprising to industry experts, who explained a few reasons for the attrition of retail and advisory clients’ assets.

The client attrition was in line with Schwab’s expectations for the deal when it was announced in 2019 and will subside in the first half of next year, the firm said Monday. Schwab’s chief financial officer, Peter Crawford, said the attrition amounts to about 4% of Ameritrade revenue prior to the deal, or around 1% of combined total client assets as of the end of last year.

Attrition at this level is expected because as the integration nears completion, RIAs who are not a fit are leaving or having their contracts terminated, and some retail customers who chose TD Ameritrade over Schwab in the first place are going elsewhere, industry experts said.

“Some TD Ameritrade retail clients had accounts at multiple firms,” Chip Roame, head of Tiburon Strategic Advisors, told ThinkAdvisor. “Facing change, it can be expected that some would consolidate at the other firm they proactively chose.”

Also, when it comes to RIAs, “Schwab is probably a bit more disciplined company than was TD Ameritrade,” he said. “TD Ameritrade took on some large firms that had some RIA-like capabilities” but were mainly commissioned financial advisors.

“The revenue on those clients was likely small (I bet one or two basis points per year). Schwab likely chose to resign from serving those clients given the ultra-low revenue model,” Roame explained.

TD Ameritrade “understandably took those clients on to generate net new assets without as much focus on the revenue and the risks associated with those clients,” he added.

Yet it’s unlikely that Schwab declined to serve smaller RIAs, Roame says. While the idea that Schwab doesn’t serve these firms “seems to be a common headline,” the consultant says he’s not sure that is accurate. “Actually, I think Schwab had more under $100 million” RIAs than TD Ameritrade had at the time of the merger, he said.

‘Very Transparent’

Pirker Partners CEO Alois Pirker praised Schwab for being “very transparent about this, which is great.”

After all, Pirker said, “Typically migrations happen in stages with the easiest retail clients/RIAs being migrated first and the most difficult cases being moved last.”

At this point, “as the migration goes into the final stages, Schwab is tackling exactly those difficult cases and, as they stated publicly, the contract with some RIAs that don’t fit the mold will be terminated with others that are not willing to adjust making the jump themselves,” Pirker said.

Therefore, Schwab’s comments on Monday “make perfect sense,” Pirker said. “If all they lose is 4% of revenue and 1% of client assets, the acquisition has been a rousing success,” he said. “The proof will be once they run the numbers at year-end.”

Noting that Schwab has been “proactive in jettisoning TDA advisors that don’t fit their ‘risk profile’ or have small AUM prior to the switchover,” Timothy Welsh, president, CEO and founder of Nexus Strategy, said it was “not a surprise” that attrition was happening.

Also, “retail TDA clients didn’t choose to go to Schwab,” Welsh pointed out. “They were forced to via the acquisition,” so it was “not a surprise that a segment of them are going elsewhere.”


NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.