Charles Schwab, which helped pioneer discount investing in the 1970s, said Monday that it would acquire TD Ameritrade for $26 billion, a deal that underscores the dramatic changes in the business of helping people manage their money.
The deal brings together two of the largest online brokerage firms, which hold roughly $5 trillion in assets, in an industry in which intense competition is driving costs down for average investors.
“This would create a true behemoth in the retail brokerage space,” Chris Allen, an analyst at Compass Point Research & Trading, said in a research note.
Once the fledgling upstart itself, Schwab has become a powerhouse in the personal finance world over the past four decades. Last month, when it said it would eliminate fees for trades of stocks and exchange-traded funds, other rivals including TD Ameritrade and E-Trade were forced to follow suit.
It was an inevitable maneuver for an industry locked in a price war over retail investors, who are increasingly leaning away from picking and owning individual stocks and more toward low-cost index funds and services that incorporate investment advice.
“The move to zero commissions in the industry has put several firms in a really tough spot,” said Alois Pirker, research director at Aite Group, a research firm that tracks the financial services industry.
For Schwab, eliminating commissions cost perhaps $100 million a quarter, or roughly 4% of overall revenue, the firm said. But for other players — like TD Ameritrade and E-Trade — the loss of that revenue created a much larger dent.
Schwab, Pirker said, had been diversifying its businesses away from just trading revenue over the past decade.
“A couple of years ago, they started calling itself a full-service firm — delivering financial planning and advice in general,” he said. “And the diversification of revenue has gone hand in hand with it.”
TD Ameritrade’s stockholders will receive 1.0837 Schwab shares for each TD Ameritrade share, a 28% premium over TD’s stock price Nov. 20, the day before talks of the deal were first reported.
Schwab’s president, Walt Bettinger, called the deal a “unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution.”
The agreement will give Schwab another 12 million retail customers, doubling its total customer base to 24 million.
That would catapult the combined firm’s customer count just ahead of Fidelity, which has 22 million retail accounts. Fidelity — perhaps not surprisingly — called the combination a poor deal for consumers.
“Unfortunately for investors, the combination of Charles Schwab and TD Ameritrade means they will likely be doubling down on revenue practices that directly disadvantage investors,” said Kathleen Murphy, president of Fidelity Investments’ personal investing business, in a statement.
Even investors who do not have direct accounts with Schwab or Ameritrade could be affected by the deal.
The two companies are among the largest providers that help support independent registered investment advisers: They hold customer assets, execute and clear trades, and handle much of the administrative work that goes along with it.
Schwab is already the largest so-called custodian, with $1.8 trillion in assets managed by registered investment advisers; it controls roughly half of the market, according to Keefe, Bruyette & Woods, an investment bank that specializes in financial services. Ameritrade now ranks as the third-largest player, with up to 20% of the market. Fidelity is in second place.
“We think this deal may face somewhat significant antitrust hurdles,” Kyle Voigt, an analyst at KBW, said in a research note, “depending on how the competitive market is viewed by relevant authorities.”
Smaller investment advisers who work with TD Ameritrade — like George Papadopoulos, a certified financial planner in Novi, Michigan, who manages $37 million in customer assets — worry that Schwab will decide it has no place for them. Papadopoulos said Schwab refused to work with him when he was just starting out almost two decades ago.
Several of his colleagues who are still in the early stages of building their own firms have likewise found a home at TD Ameritrade, he said.
“What will happen to them?” Papadopoulos said. “We are used to lower levels of service, so we expect that to continue, of course. But at what point will Schwab decide that the advisers with less than a certain amount of assets under management should belong in the fold or let them go?”
Schwab, based in San Francisco, has more than 19,000 employees and manages an estimated $3.85 trillion in assets. Charles R. Schwab, who founded the discount broker in 1971, is the company’s chairman. TD Ameritrade, with about $1.2 trillion in assets and headquarters in Omaha, Nebraska, has more than 9,000 employees. The headquarters of the combined company will eventually move to Westlake, Texas.