Schwab-TD may draw investors
Experts: Merger lowers costs but limits choice
Charles Schwab and TD Ameritrade are hooking up. So what does a marriage between two of the world’s biggest brokerage giants mean for the average Joe investor?
The bottom line: There will be one less choice for mom and pop investors looking for a discount brokerage, but that could be a good thing in the long run.
Schwab announced plans on Monday to buy rival TD Ameritrade in an allstock deal valued at $26 billion. Not only does the acquisition create a brokerage titan with more than $5 trillion in client assets, but it underscores Schwab’s mission to democratize access to financial services, analysts said. Discount brokers are now vying for customers with dirt-cheap fees.
“Decades ago, a commission on a stock trade was a barrier to entry for many investors,” said Mark Hamrick, senior economic analyst at Bankrate. With the recent move among online brokerages to eliminate commissions, those hurdles are gone, he said.
“Charles Schwab and TD Ameritrade believe a combined company can operate with even lower costs, and that’s really throwing down the gauntlet to other banking giants who will feel some pressure as a result of this combination,” he said.
An evolving industry
A deal between Schwab and TD Ameritrade consolidates an industry facing crimping profitability. Brokerage desks have come under pressure this year because of declining stock-trading volumes.
Investors have become more cautious amid concerns over slowing global growth and trade tensions between the U.S. and China. At the same time, the
“For investors, continued consolidation in this industry is going to ultimately bring down costs for the consumer.” Adam Holt, Asset-Map
Federal Reserve has cut borrowing costs three times this year, which has hurt electronic brokers’ ability to collect interest on customers’ cash.
Shares of Schwab and TD Ameritrade, which rallied 7% and 17%, respectively, on reports of the merger last Thursday, have each underperformed the broader market in 2019. Schwab’s stock has risen about 17% this year while TD Ameritrade has added about 4%, compared with the S&P 500’s roughly 25% rise.
On Monday, Schwab shares rose about 2% after the deal was confirmed by the company, while TD Ameritrade gained roughly 8%.
Race to zero fees
Schwab, the largest publicly traded e-broker, said in October that it would eliminate commissions on online stock trades, offering clients no-fee trading on stocks, exchange-traded funds and options.
Rivals TD Ameritrade and E-Trade followed suit, offering zero-commission trades. Asset management firms including the brokerage arm of Fidelity Investments and Vanguard Group have also eliminated fees recently for many funds. The race to zero came after years of declining commissions across the brokerage industry.
Some analysts see long-term benefits for brokerage customers.
“For investors, continued consolidation in this industry is going to ultimately bring down costs for the consumer,” said Adam Holt, chief executive officer at Asset-Map, an adviser financial technology company. “Prices for trading and investment management are going to continue to decline, which ultimately serves all investors by creating less drag on their results.”
Merger would create big RIA custodian
There’s a risk that Schwab and TD Ameritrade could lose customers since they would potentially need to move their assets into a new firm, said Jennifer Butler, director of asset management and brokerage research at competitive intelligence firm Corporate Insight. Schwab and TD Ameritrade are among two of the biggest RIA custodians in the industry, which potentially means fewer choices for advisers, according to Butler.
Schwab is the leading RIA custodian, with Fidelity and TD Ameritrade ranking second and third, according to Financial Advisor Magazine.
“It’s a more cost-effective environment, but the choices for investors are going to be limited with more acquisitions occurring,” Butler said. “When advisers have fewer choices, that means there’s only so much they can do for their investors and their brokerage businesses.”
More mergers could be coming
Investors should expect a wave of more merger activity in the sector, which will likely benefit online broker stocks, analysts said.
“We expect most firms in the sector, including (E-Trade), to be in merger discussions given the pressures on the business,” analysts at Bank of America Merrill Lynch said in a note. “Over time, if firms are left out, it could create some pressure on those stocks, and as the distribution platforms become larger, it could also create a bit more pressure for the asset management industry.”
Investors stand to benefit
Lower fees typically help investors because more of their money goes back into their pockets. New investors should exercise caution and beware of making risky stock bets, experts say. Still, consumers now face fewer hurdles to trading, some analysts said.
“Low-cost trading supports the consumer agenda greatly by taking away barriers in the form of costs, even for somebody just starting out,” said Holt. “The key to building any level of financial security is to start somewhere. Getting past that early deterrent is key to building wealth.”