Schwab-TD Ameritrade Deal Is No Sure Thing

Charles Schwab's reported move to purchase TD Ameritrade for $26 billion, reported early Thursday, is the talk of the industry and shouldn't come as a surprise, industry watchers and advisors say.

"It's big news, as yet another example of the massive consolidation taking place in financial services," said Vance Barse, wealth strategist and founder of the firm Your Dedicated Fiduciary.

But don't bet on the merger just yet, some say.

"There are some potential antitrust issues," according to Joel Bruckenstein, a certified financial planner and head of T3 Technology Hub. "These two firms have been fierce competitors for years on the advisor and consumer side. Will there still be sufficient competition if they merge? It is difficult to know how regulators will view this."

Analysts with Keefe, Bruyette & Woods say Schwab has an estimated 50% market share as an RIA custodian, while TD Ameritrade has roughly 15%-20%. Fidelity, which is privately held, has about 25%.

"We think this deal may face somewhat significant antitrust hurdles, depending on how the competitive market is viewed by relevant authorities," said KBW's Kyle K. Voigt and Matthew Moon in a research note on Thursday.

More M&As

Talk of the merger, which could create a firm with some $5 trillion in client assets, is still unconfirmed by both parties. The report comes a week after the Advisor Group network of broker-dealers moved to buy rival Ladenburg Thalmann in a deal that unites up to 11,500 advisors and $450 billion in assets. (Fox Business broke the story early Thursday).

"We hear it over and over again at industry conferences, especially in terms of consolidation continuing for RIAs and independent practices," Barse said. "It's happening now and getting faster. It's time to embrace [it] as the new normal for the foreseeable future."

Carson Group CEO Ron Carson concurs with Barse and is not surprised "at all" by the news.

"The profession is beginning to realize we don't need 50,000 trading departments, research departments, marketing departments or compliance departments," he said. "It's the biggest deal of the year and speaks volumes to how we're on the eve of going from a traditionally inefficient industry to one that is more streamlined."

Timing Is Right

"In general, the management of companies like these, often led by some pessimistic CEOs, might look at the financial markets going forward and say, 'It's now or never. We won't get a better price if we wait," said recruiter and industry veteran Jon Henschen. "It's all market timing, as with Advisor Group-Ladenburg, and profitability."

Recent industry trends that have added to costs and led to related pressures meant "it was going to be a struggle for TD to stay in the game," he added. "So the options were to sell now with the markets being 'toppy' or keep going with hard-to-maintain profits. Then zero commission nipped it in the bud."

News of the biggest merger to hit financial services in decades comes just seven weeks after the main brokerage firms dropped commissions to zero. (Neither Schwab nor TD Ameritrade responded to requests for comment as of press time.)

Tech Worries

Other issues also may cause trouble for the deal, says Bruckenstein.

Culturally and with respect to technology, he points out, there are differences between the two firms: "I doubt their systems are fully compatible. That will be a challenge."

While TD's Veo has over 170 integrations with third parties, he said, "Schwab only has a fraction of that number. What does that mean for third-party vendors? Some will likely be frozen out."

TD Ameritrade's culture and technology have been impressive to advisors, according to Henschen. "What will happen to this technology? Will Schwab integrate some of it [for its advisors] and keep it the same for those [coming over] from TD?" he asked.

Usually, the firm making the purchase leaves the acquired entity alone for a year or two and then starts making changes like a slow drip, he adds.

If the deal goes through, "We'll probably have a better idea of what these changes will look like by next summer," Henschen addedd. "It's going to be a while until we see what changes Schwab intends to implement and how they will affect back-office operations."

— Related on ThinkAdvisor: