The Compound and Friends - What the Schwab - TD Ameritrade Merger Means for Financial Advisors (with Josh and Michael)

Episode Date: November 26, 2019

Charles Schwab is merging with one of its largest competitors, TD Ameritrade in a $26 billion all-stock deal that should close in the second half of 2020. Michael Batnick and Downtown Josh Brown of Ritholtz Wealth Management discuss what this will mean for the thousands of financial advisors who use one or both of these custodian brokers for their clients' assets.  1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Check out our channel "The Compound" over on YouTube: https://www.youtube.com/thecompoundrwm Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, I'm Josh Brown. We're live from the compound. I'm here with Michael Batnick to talk about what I consider to be the biggest news in the registered investment advisor space of the year. Schwab is going to be buying TD Ameritrade for $26 billion in an all-stack transaction. We're just going to talk about what we think the impact might be, what we think drove it. Stick around. Let's get into it. Mike, when you first heard the news, were you like, oh my God, I can't believe this? Or were you just like, yeah, that makes sense. Yeah. I'm the latter. I think so. I think I was too. I wasn't, oh my God, shocked. I was like, oh my God, this is huge news. Well, it is huge news.

But when I saw it, I was like, I get it. We probably all should have known when Tim Hockey announced he was not going to be the CEO of TD Ameritrade going forward and what that might have meant for this particular segment. Maybe the board and he disagreed on this course of action of selling the firm. I don't know. This guy Judd Mack Mackrell, tweeted, Schwab dropping commissions to cut profits by 6%, forcing TD's hand to drop theirs,

costing them 25% only to buy them as the deal of the year. Right. So they wrecked the share price of TD Ameritrade. And then a month later, they put a premium on buying it that I think probably wasn't much higher than where it was. Perfectly executed. Perfectly executed. Perfectly executed. This one might go down in the Hall of Fame.

So I think that this is much bigger industry news than it is consumer news. In other words, all of the benefits, in my opinion, or most of the benefits, are probably already accrued to customers. To the end clients, regular investors. Yeah. And that this is much bigger news for the industry. And I'm curious to know what's going to happen to the, I think there's 19,000 employees at TD Ameritrade and 9,000 at Schwab. How's this going to impact them? So I was reading a little bit about the impact on

the industry itself. I'm sorry, can I say that back? It's 19,000 at Schwab, half of that at TD Ameritrade. Right. Schwab is much bigger. bigger. So I was thinking about the impact on registered investment advisors. And so there are 11,000 registered investment advisory firms. And this will create, as it stands on day one, a custody business that serves 10,000. So almost every firm in the industry works with either Schwab or TD Ameritrade. And I think of that 10,000, TD Ameritrade has 7,000 and supposedly 3,500 of those 7,000 are TD only. So now they're going to be basically Schwab clients overnight, assuming Schwab wants to keep them. So let's say that this deal takes, I don't know, a year, years to go through. Is there going to, like, is there going to, are they going to continue to operate as separate entities?

I don't know. I would, my need, like my best guess would say yes, they do. I think for a while, but not forever. Why do it? Because in other words, why do it? Oh, well. Why would you service two different, Because service is the biggest cost. Because repapering everything to integrate it, I think, costs way more than it's worth.

I think that hopefully Schwab takes some of TD Ameritrade's technology. Yeah. Oh, I hope so, too. And brings itself into the 21st century. Yeah. So full disclosure, we custody with both Schwab and TD. And most of our assets are at TD. And we love their service. We love their technology. No, and I think we'll change in terms of how advisors work with the custodians as maybe some of the referral programs

that go on. That will have to be rethought. Yes. And I wonder, again, what roles are duplicative? What's going to get cut? Hopefully, it's not too bad. Yeah. So we don't use any of the referral programs. Every client of our firm that comes on, comes on for us. But some of the biggest RIAs in the industry, and I think a majority of RIAs that are mid-sized and large are in these referral programs. So basically, they put an advisor in the branch and, you know, the branch of, let's say, TD Ameritrade or Schwab, and they'll get a referral from that firm. And, you know, part of the fee that they end up charging the client, they pay it back to Schwab or TD. I can't imagine the advisor will have more bargaining power after this. They're almost the only game in town other than I think Fidelity still has a referral program.

So that's a good point. That'll definitely affect the growth rates of a lot of RIAs who have lived off of that. And we're not there. We're not a player there. But we know a lot of firms that are. The other thing I was thinking about, and I'd love to hear what your thoughts are on this. You've recently been down this rabbit hole

of navigating all of the new trading costs now that Schwab has dropped commissions, TD dropped commissions. We've got various separate account management strategies. For US stocks and ETFs. Right. And then there are different rates for block trading. The dust has not settled, I guess is my point, right?

Correct. Okay. And then does this speed that process up of them making these decisions? No, I don't think so. Okay. So there are a lot of things that RIAs don't know about what their costs are. You know why I don't know that it's going to be one giant unit in five years is because don't

you think or do you think that each of these has very distinct brand recognition? Yes. So are there going to be closures of branches if there's a Schwab branch on one block and a TD Ameritrade branch three blocks over? Yes. Yeah, maybe. Yes. But I still see a future in which these units operate independently of each other. So the combined company will have $5 trillion in assets. $2 trillion will be in custody assets

between TD and Schwab. So advisor custody assets will be about $2 trillion. And now the question becomes – Well, wait. Where's the rest? The rest is retail. Okay. Like Schwab Direct, TD Direct. Mostly Schwab though.

But now the question becomes like if you're the advisor and you have your assets custodied at both Schwab and TD. Do they give you any kind of incentive as the advisor in terms of cost or better service or better technology to move from one unit to the other while they do that longer term integration? I would imagine that the differences are going to be leveled. Okay. Why would they favor one unit over another? Well, they might make more money on one side than the other. Unless it becomes one unit. Unless it all becomes one thing. But again, are client accounts going to have to be repapered in that event, which would just be... Well, there's something called negative consent. When a client opens an account and the custodian, let's say, is TD

Ameritrade, the client is signing in advance an agreement that if TD Ameritrade is acquired by another company, the accounts will automatically transfer at will to the buyer. That doesn't mean there won't be any paperwork, but it's not like they have to win all those customer accounts over. It's going to happen automatically. What about stuff like Schwab's conference and TD's conference? Well, TD's conference will go away.

Why would they do that? I don't think it will. Why would they continue it? I don't know. I mean, I don't know the economics of it, but I don't think that it's going to go away. Well, the economics of it is they give it away. Schwab charges you to attend Impact as an advisor. TD's like, if you're a TD advisor, please come.

So that's interesting. There's this cultural difference. The rep of TD Ameritrade Institutional among advisors has always been like, they're smaller, they're scrappier, they'll work harder on service for smaller advisors than Schwab would. And Schwab wouldn't let them in. Schwab doesn't want all these tiny advisors because they're just not profitable. TD is like, come on in. And that's how they got to 500 or 600 billion in RIA assets.

By taking in somebody that's like, hey, I'm starting a firm. It's going to open with 30 million in assets. Schwab wasn't hungry for that business. TD was like, let's do it. And was Fidelity? I don't believe so. I don't believe so. I don't think so. So TD had this rep as like, we will fight for the smaller advisor and provide. And Schwab's claim to fame was, well, we're better.

Like we have better service, better technology. But I think over the last five years, the playing field has leveled. I think TD has gotten way better than probably what it used to be. So it wasn't just servicing small advisors. There are big firms that are primary TD now, which maybe there weren't a decade ago. So I don't know how that cultural change will play out. At RIA Biz, shout out to Brooke Southall, they published something under the headline, 10,000 RIAs in the twilight zone. Like they don't know what this is going to mean to them. And at the lower end, you have to be thinking,

uh-oh, I might be part of the cost savings. Like they might not want to cater to me anymore, or they might raise my costs to drive me to consolidate. Like, I think that that's definitely a thing that if you're a sub $100 million RIA, which the majority are, you're like, all right, my cost structure to service clients on these platforms might change. What about regulatory holdups?

They'll have a pretty big piece of the pie now. Oh, like antitrust? I mean, we know what will be looked at, but they're going to point to Fidelity. Fidelity is $7 trillion in assets. It's bigger than the combined Schwab TD. So that's what they'll do. And they'll point to Vanguard, and they'll point to Merrill Lynch, and they'll be able to demonstrate that while they'll have a big chunk of the RIA custody business, they're not materially changing the landscape in terms of all brokerage assets. Because each of the wires has a couple of trillion bucks.

And they'll be able to, I think Fidelity and Pershing have huge custody businesses as well. I think they'll get through it, especially in this era. It seems like there's not a lot of holdups for mergers in the Trump administration, unless you happen to own CNN and are critical of him. But like in financial services, we haven't really seen them say no to anything. So I don't know that that's the big concern. The last thing I want to ask you, when you don't get guidance from these two firms about whether or not it's all going to be one unit or if there's a timetable, like if they don't start answering those questions over the next few weeks, what do you do with clients who want to open new accounts with you? I imagine you just continue on business as usual for a while. They don't know.

Who doesn't know? Your service reps. They don't know. Who doesn't know? Your service reps. They have no idea. They can't tell you anything. So first it was a zero commission stuff that was dropped on their head. Right. And then this. So I'm sure that they're, I don't know if they're scrambling, but like.

Right. So if the RIA firm calls up TD and says, I'm about to open a $5 million relationship, do I custody it on TD or just go ahead to Schwab? Like, what are they going to say to you? They're going to say, it's business as usual here. That's what they have to say. So that'll be interesting. goes on for, you know who I think it favors? The smaller custodian businesses that are going to try to make hay out of this, like Trade PMR. And I think you'll see like Betterment for Advisors get some benefit here. That kid we know, Jason Wank at Altruist, he's trying to, you know,

turn this into something that helps him open new accounts. Like if they keep that that Twilight Zone feel alive for a while then these other upstart custodians have a window where they could be like look we're not buying or selling you can start opening accounts right here

and I think Fidelity can do the same thing. All right let us know what your thoughts are I know this is a little bit inside baseball a lot of this pertains mostly to RIAs and financial advisors, but we'd love to hear what you think. Go ahead and smash that like button for us if this was a good video for you and subscribe. If you're not subscribed, I don't know what to tell you.

We're breaking, I think, 17 or 18,000 subs and there's a reason. We're working really hard on these videos. So we'll talk to you soon.