From disruptors to disrupted

TD Ameritrade’s US$ 4 billion deal to acquire Scottrade Financial Services Inc. will not only give the company greater scale, but also highlights the ongoing push of discount brokerages into the wealth management sphere amid growing competition in the financial services market.

The transformation comes amid the rise of exchangetraded funds, which have lowered trading volumes and commissions revenue, and the emergence of hyper-lean competitors such as roboadvisors that are increasing the competition for onlineonly clients.

Monday’ s deal follows four decades of evolution for discount brokerages, which began in the 1970s, when companies such as Charles Schwab and Fidelity rose to dominate the market after American regulators abolished fixed commissions for brokers. Two decades later, online brokerages were the disrupters, as the Internet allowed the growth of companies such as E* Trade and TD Ameritrade.

Now, with a more mature business, those companies are looking to change again. Monday’s deal will see TD Ameritrade increase the number of physical branches it has fourfold, a move preceded by competitors such as Charles Schwab Corp.

“It ’s representative of changes that are occurring in the industry — one of the most important things in this acquisition is TD Ameritrade picking up the 500 physical branches that Scottrade had,” said Michael Wong, senior equity analyst with Morningstar Inc. “You see this movement toward the middle of some of the financial services firms. You see the traditional banks closing their branches as they go more digital, and you see these discount broker- ages going from a primarily online platform to expanding their physical presence.”

Tuesday’s deal will create a company with more than 10 million client accounts and close to US$ 1 trillion in assets. TD Ameritrade is the bigger of the two companies, with some US$774 billion in assets as of the end of September, while Scottrade had some US$170 billion.

The deal creates both scale in assets, as well as a larger footprint on the ground for to take on larger competitors. TD Ameritrade gains many more branches — it currently has about 100, while Scottrade has some 500. The new company will have a total of 450 after consolidation executives said Monday.

Other discount brokerages have been expanding their physical presences as well. Rival Charles Schwab announced last September that it is opening 150 new branches over the next five to 10 years, employing some 1,800 new financial advisers. The company is the largest online discount brokerage, with some US$2.6 trillion in assets under management.

Rodger Riney, Scottrade founder and chief executive officer, said the deal allows the companies to compete in what he called “today’s rapidly evolving financial services industry.”

That evolution has seen the rise of low-cost competitors. Robo- advisers, which use computer algorithms to create investor portfolio based on questions that determine an investor’s risk tolerance, are quickly gaini ng marketshare. Other competitors, such as stock trading app Robinhood, are aiming to win the war by offering entirely zero-commission stock trades to clients.

Analysts note that many discount brokerage firms, which once relied on commissions as their bread and butter, have been diversifying away from commissions in recent years as stock trading fees have moved lower.

“We’ve actually seen commission play an overall lower piece of revenue,” said Brett McDonald, senior analyst at Strategic Insight about Canadian discount brokers. “They’ve been declining as a percentage of the total revenue generated by the online brokerage firms.”

While analysts said that Monday’s deal will not lead to a transformation of the discount brokerage industry, it is a small step in an ongoing evolution.

“This is part of the transformation of discount brokers into quasi wealth management firms,” said Wong.

WE’VE SEEN COMMISSION PLAY A LOWER PIECE OF REVENUE.