Consolidation is great when you’re chasing internal efficiencies. But thinning the competitive field means less choice for advisors until new players emerge.
So it’s official. Schwab is paying $26 billion to absorb one of the few rival custodians willing to support a competitive advisory platform.
Wherever you are in the industry, this is eventually going to be an event worth cheering. But the road to that happy ending will get bumpy in the near term.
This is an opportunity to shape a professional future that’s materially different from what we have now. The only question is what you actually want from the custodian of tomorrow.
The math is the motive
Schwab is paying a healthy strategic premium for the right to expand its lead on Fidelity in the advisory market. Using normal industry metrics, the deal values TD Ameritrade at $2,000 per account and a healthy 5X annual production.
Again, it’s a little rich, but the increased scale should make it all worthwhile. A theoretical Schwab Ameritrade will easily have $5 trillion in client assets, making it not only a leading U.S. brokerage channel but an institution comparable to just about everything else on the planet.
In a zero-rate world, those assets don’t really generate a lot of passive platform income. You need to gather exponential amounts to turn into real money.
And in the zero-commission world Schwab has opened up, active income has peaked as well. Ameritrade captures a total of 0.4% in total fees, interest and commissions on its AUM.
Naturally advisors do better with a full-service model, but don’t scale the same way. Every successful practice is difficult to separate from the people who run it.
Schwab, Ameritrade and their competitors are the institutions. They think along institutional lines and face institutional challenges.
This merger is for them and the people who treat them like utilities. This is as good as it gets for self-directed investors who aren’t a good fit for professional advice.
Whether it’s good for advisors who park about $2 trillion in Schwab and Ameritrade today is a more complicated question. It’s always a matter of fit.
Some people will be happy with the combination of platforms. They aren’t losing a potential partner. They’re gaining access to everything both custodians provide.
Others will mourn the specific operating environment that one or the other supported. When you force 14,000 advisors together, somebody’s going to fall through the cracks.
That’s what people are most worried about today. Change brings anxiety and in a business that cherishes reliable results, nobody wants the boat to rock.
The next six months will tell Schwab and Ameritrade affiliates everything they need to hear about the new world. The custodians will do everything they can to sweeten the story.
But the platforms were always in flux and advisors were always in motion. When due diligence revealed that changing custodians was worth the headaches, people transferred the accounts.
A year from now there will be one fewer giant in the mix. Making the decision to stay or go will get a little easier.
Disruption and the disrupted
And down the road, Schwab and Ameritrade each have fewer reasons to invest in innovative services to court and keep advisors. Together, they dominate the industry. Their business is close to mature.
From here, they’re more about scale than ever. Cost will guide them more than ever. Innovation and its disruptive rewards are more threat than thrill.
That’s okay. Maybe you’re comfortable too. If you’re looking for disruption, you’re unlikely to find it with the company that increasingly defines the industry status quo.
Fidelity and Pershing, on the other hand, need to dazzle in order to avoid being relegated to second-tier status for the rest of their corporate lives. They’re still giants, but when you’re No. 2, you naturally try harder.
But maybe that’s not where either company really wants to go. Fidelity, after all, is a mutual fund complex that also shares its custody and clearing platform.
It doesn’t really want to be Schwab. It wants to be Vanguard.
And Pershing is its own entity as well, more interested in playing its role within the BNY Mellon ecosystem. That’s what drives a lot of internal innovation there.
Beyond that, people who truly want to provide a next-generation RIA platform are free to step up. This is a long-term opportunity.
Everyone who was conscious of four big choices and is worried to see that number reduced will soon have an empty slot on the due diligence list.
Someone can step up and fill that slot. If multiple people try, then multiple visions of where the industry needs to go will compete in the marketplace.
Right now, to be honest, I don’t know what that looks like. We need to go back and see where the stress points were in the four-custodian hegemonic world, what needs were imperfectly satisfied and what advisors will need in the near term.
We also need to see what gets lost on the labyrinthine shelf of Schwab Ameritrade. Where rival solutions appeared on both platforms, one may drop out in an effort to streamline the offering.
Those solutions will soon be in play as the raw parts of a new platform. Maybe they add up to something better and liberating for some advisors. If so, that’s the fourth slot on the screen.
My sense is that it’s going to be a golden age for a la carte solutions either way. Unless one of the surviving platforms provides a perfect fit, the building blocks will be available at a competitive price.
It’s a great moment for experts to build a truly bespoke environment to fit their professional goals. Coincidentally, I just got email from an RIA technology integrator, Robb Baldwin, founder of TradePMR.
He’s already looking ahead to a big uptick in queries.
“Times of uncertainty like this creates angst for financial advisors who wonder if they will be marginalized or left behind once the dust settles. If the TD/Schwab deal does go through, there will be lots of complexity to work through. Advisors are busy enough taking care of their clients and running their businesses. Any hiccups or possible complications will be hard for them to stomach. When I was an RIA, I experienced first-hand what a fiasco it can be when two custodians merge. So advisors are rightfully concerned about what a merged TD/Schwab scenario will look like for them.”
The giants are moving. There’s enough opportunity falling between their rounding errors and other adjustments to feed the rest of us.
And that’s another thing that’s worth watching here. Despite rumbling about regulators, sewing up 51% of the RIA channel and a big piece of the self-directed trading business is really only a small piece of the overall asset mix.
Just as LPL dominates the IBD world, Schwab Ameritrade now has the big footprint in the RIA space. But the wirehouses, regional brokers, direct mutual fund complexes and everyone else still collectively outweigh them.
There are a lot of channels. New business models are being born all the time. Five years from now, the overall landscape may be very different.
Automation comes with price disruption. That’s the entire Schwab story. Robot advisors are here. I suspect Schwab Ameritrade is going to unleash a lot of robots.
The first generation of standalone robot vendors is going to need partnerships to keep up. Suddenly they might actually be your friends.
They’re looking for human expertise, a way to differentiate and soften their commoditized math from every other website running a portfolio.
Maybe that’s you. Maybe they’re the seed of your platform to come. Maybe it’s a match made in heaven, only on a much smaller scale than what Schwab and Ameritrade are doing.
Leave them that territory. We deal in more human experiences, day by day.