What Morgan Stanley's $13B Discount Dive Means As Industry Consolidation Accelerates

We said Schwab Ameritrade was only a warning shot. Now that wirehouses are locking in assets, channel wars are heating up. Pick your sweet spots now.

To some, the notion of a top-tier wirehouse stretching its balance sheet to absorb a discount brokerage breaks the trend of history.

The industry was supposed to evolve in defined channels. Discount do-it-yourself shops dealt in nickels and dimes while big money was worth courting with high-service wealth management services.

Money migrated up the food chain as accounts grew in size. The low end is a commodity business. The high end is all about relationships. Remember that world?

Morgan Stanley buying E*TRADE is something different. They’re not just looking for scale, although it’s handy to capture close to $700 billion in retail assets spread across 5 million accounts.

That’s $140,000 per account. These are not the kind of investors who would make a good fit for elite private banking. 

But elite private banking could make a great fit for them, as long as you find a way to deliver the research and expertise across the platform.

I’m sure James Gorman and the Morgan board will cheer if any of those accounts migrate to their full-service world and pay the fees. I think they’re more interested in migrating their full-service world down to mass retail.

This is not a scale grab. They’re not bolting on AUM. They’re buying reach. Think of the TAMP model, where you build technology in order to deliver expertise.

E*TRADE is just a trading platform. It’s technology. Morgan is expertise. Push their expertise through the platform, price it accordingly and you’re going to win hearts and minds.

And while do-it-yourself traders on the platform may roll their eyes at the notion of paying anyone to call the shots, they recognize the value of having the reearch available.

Schwab Ameritrade can’t do that. They’ve got the combined scale but it’s a pure commodity relationship: park your money with us, we won’t charge you to move the assets around. 

Fidelity keeps playing with proprietary research but it never really sticks. Vanguard will evolve in this direction as well, probably with onboard financial planning.

And mighty Goldman Sachs covets this strategy. Last year we were talking about them buying E*TRADE as a way to deliver the famous research to the mass market.

They missed this chance. I have a feeling they’ll just end up building their own system, possibly partnering with a consumer tech brand like Apple or Amazon.

Either way, it’s a long way from the rarefied private banking world. Those of us in between do-it-yourself no-frills accounts and the full-service relationship will persist in our sweet spots. We know our market and our lane.

This is a bad sign for pure robo platforms. They don’t charge real commissions and are desperate for scale in order to make money on the float.

No value add or competitive differentiator means that “float” will look more like a churn. It’s expensive to retain accounts in that world. Margins are too tight for that.

E*TRADE took in most of its revenue on interest last quarter. It earns about 0.27% annualized on money and securities parked on its system.

And that’s with scale on its side. Commissions are headed to zero around the industry. If you don’t have scale yet, you need it fast.

What happens to Schwab Ameritrade? They have scale but if the Morgans and the Goldmans of the world crowd into their space, they’ll be on the defensive fast.

I think the independent advisors who work with Schwab and Ameritrade are the value-added ace in the hole there. Maybe there’s a place for that conversation to evolve as the other giants start feeding.

For now, it’s clear. You’re an acquisition target at 16X profit or 5X revenue. Assets are in play. If you’re looking to be a consolidator, reach for targets now. Otherwise, hold out for a great offer.


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