Thread by @MichaelKitces

Mega news this week is prospective merger of Schwab & Ameritrade. Getting a lot of questions, so wanted to share thoughts on what #Schwabitrade may mean for advisor community & from advisor's perspective...

Charles Schwab Holds Talks to Buy TD Ameritrade on.wsj.com/35mZF0v

Schwab was/is already the #1 player in the RIA custody space, having effectively created the independent RIA platform by launching Schwab Advisor Services in 1993. TD Ameritrade was their longest standing competitor, but much smaller (relatively speaking) in the RIA channel.

RIA custodians hold their cards close to their vest, but the estimate is that Schwab serves 7,000+ RIAs while TD Ameritrade serves about 6,000 of them. However, Schwab has almost $2T in RIA assets compared to TD's ~$600M.

Thus, there's a REALLY material difference in typical RIA on the two platforms. Schwab (and Fidelity) over the years raised RIA asset minimums, & "cast-offs" went to TD Ameritrade. In fact, much of TD's growth for 10 yrs was 'small' advisors who couldn't get Schwab or Fidelity.

In this context, the potential of #Schwibatrade is already raising worries from 'smaller' RIAs (<$100M & especially <$20M) at TDA that once Schwab pulls them in, they'll get 'kicked off' for being too small?

However, the whole point of this deal for Schwab is to bulk up assets and get better economies of scale. Suspect we won't see small TD advisors get the boot anytime in the next few years at least. However, will likely get bottom tier Schwab service teams & little other support?

On the other hand, for advisors who HAD TO choose TD Ameritrade over Schwab, the merger creates real issues. Former Schwab Private Client or branch FCs who leave Schwab usually can't stay on RIA platform & must go to TD (or Fidelity). Unclear if THEY can stay if Schwab buys?

Similarly, RIA custodians have long had deeply concerning policy of preventing younger advisors from going out to start their own firms on the same platform if their prior (larger) firm tells the custodian not to. What if Schwab-denied advisor went to TDA & now is back at Schwab?

Arguably, though, the biggest potential shift that comes from Schwab acquiring TDA is the #AdvisorTech #FinTech landscape. TD Ameritrade was THE pioneer in open architecture APIs for RIAs with VEO after the TD/Waterhouse merger in 2006. kitces.com/blog/tom-bradl…

By contrast, Schwab has tended towards a more closed architecture, & various attempts over the years to bring tech in-house & make it proprietary (e.g., PortfolioCenter acquisition in late 1990s, building new PortfolioConnect in 2019), with limited success. Innovation sought TDA.

And so while it will take a few years for dust to settle, will Schwab opt for more VEO-style open architecture #AdvisorTech platform in the future, or pull TD into less-open OpenView Gateway platform? Loss of TD VEO would be a real loss to #AdvisorTech startups going to market.

#Schwabitrade deal will also ripple through platforms' respective Advisor Referral programs. Schwab Advisor Network flows are rumored to have slowed in recent years, in no small part because Schwab is pulling more of the $100k to $1M clients to its OWN programs (SIA, SPC, etc.).

TD Ameritrade's AdvisorDirect program has been incredibly lucrative for the early firms that went deep there (Mallouk's @CPIWealth built a TON of AUM there), and while low-hanging fruit has been picked now, Scottrade acquisition had brought a new wave of AdvisorDirect prospects.

Accordingly, TD acquisition expands opportunities for advisors on SAN, adds new competition to RIAs on AdvisorDirect. BUT, will Schwab push up soft or hard minimums to take more of those TD mass affluent clients THEMSELVES anyway? Retail has better margins than RIA custody...?

Especially since Schwab is staking its future on a no-commission world. Right now they're EXTREMELY reliant on Net Interest Margin on cash. But the future looks like more managed accounts (SPC, SIA, etc.)... converting TDA retail into Schwab managed is a big $$$ opportunity.

The real game-changer, though, is that I think Schwab is about to launch a giant retail Direct Indexing offering. Thus the no-commission trades, AND the fractional trading rollout. Schwab is trying to get enough scale to actually kill the mutual fund & ETF industry altogether?

A $5T+ direct indexing platform opens up immense new revenue opportunities for Schwab. Perhaps charging bps for the service. And turning mutual fund & ETF business into a zillion individual stocks can explode payments for order flow & securities lending? kitces.com/blog/the-lates…

Schwab has already intimated that Direct Indexing offering would probably be retail first, though, as advisors are 'slow adopters' of such new solutions. (And frankly, #AdvisorTech to manage it is more complex to build & integrate.) Buying TDA retail just expands opportunity.

In fact, notwithstanding the advisor focus on the prospective deal, suspect Schwab buying TDA is first & foremost about overall asset scale (regardless of channel), second about getting TD retail assets to cross-sell into Schwab solutions, & only third about bulking up on RIAs.

However, given that the RIA space is dominated by 'just' 3-4 players - Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions (the latter already much smaller than the others), real concern of the deal is that #Schwabitrade leaves TOO LITTLE competition for RIAs.

As while there are some new start-ups trying to threaten existing RIA incumbents (e.g., @altruistcorp) and retail players trying to come deeper into the space (e.g., @ETrade acquiring TCA), the big-3 already absolutely DOMINATE in assets & # of RIAs.

And it's not clear if #Schwabitrade vs Fidelity vs bunch-o'-niche-players is really enough healthy competition in the RIA channel. This is actually, by far, my biggest concern about the deal.

Of course, the FTC may also have something to say about this, as the sheer size of Schwab & TDA - which combined would be about $5T - does likely raise anti-trust issues. Wonder if they'll look separately at retail anti-trust (where competition is more robust) vs RIA anti-trust?

In fact, it's been surprising that amongst the advisor community, the buzz about a prospective #Schwabitrade has been almost entirely NEGATIVE. No one is excited about lower-cost w/ scale. Just reduced competition & fear service levels may decline (especially for small RIAs).

Nonetheless, custody & clearing is a scale business. That's WHY all the big RIA platforms are also retail platforms. They need the mass. Schwab wants more, & I can't fault them.

The question is what #Schwabitrade is really planning to DO with it?

/end

I know I said it was the /end of the prior thread, but getting some good follow-up questions about the #Schwabitrade merger from advisors in particular circumstances, so wanted to share a few further thoughts...

Q: Am I getting kicked off as a 'small' advisor (<~$20M) on TDA?

A: Very unlikely & certainly not soon. Mergers take time. FTC may still block. Schwab not paying TDA for assets just to boot them. Will get bottom-tier service team, but may still be better than TDA Independence?

Q: I'm a mid-sized solo advisor/team (e.g., $30M to $50M) who got rejected by Schwab in the past & went to TD. Am I getting the boot?

A: Not likely either. Schwab recently noted it really CAN serve $20M to $100M profitably. Limited services, but would leave you alone.

Q: I'm a heavy user of TD Ameritrade's VEO and the tech I use there isn't integrated (at all or as deeply) with Schwab. What's going to happen?

A: Really not clear. Schwab's OpenView Gateway has gotten somewhat more open lately. Unclear strategically if Schwab will go full VEO?

Either way (as follow up on VEO users in a Schwab world) wouldn't expect big changes in the next 1-2 years. Again, mergers take time. But the real question - which applies for Schwab regardless - is how open-architecture they want to be or not in the future. Who knows.

Q: "I'm working on an awesome secret #FinTech project and was going to launch next year on VEO. Is my go-to-market strategy in trouble?"

A: Probably not in 2020, but potentially yes beyond. Schwab has become more open lately, but VERY hard for startups to get on their roadmap.

That last point is actually one of my biggest concerns about #Schwabitrade merger. In practice, VEO has been a powerhouse of innovation, giving #FinTech #AdvisorTech startups a great first access point to go to market. If Schwab doesn't keep it, huge loss for advisor innovation.

Q: I'm an RIA on the Schwab or TDA platforms that gets a lot of business via their Advisor Network? Will I be able to get more branches from the other side?

A: Only if you're huge. There will be more branches. But also more players. Potentially too many. Expect a winnowing. :(

That prior point is another challenging dynamic of current landscape. RIA custodians increasingly are using advisor networks not just for on-platform growth, but to lure lucrative large-firm relationships. To the unfortunate exclusion of small firms that want/'need' the growth.

The potential for further consolidation of advisors serving Schwab & TDA advisor networks is especially concerning around industry diversity. If incumbents who are largest (predominantly NOT diverse) get most referrals, how do we ever get more diverse?

If #Schwabitrade does happen and leads to merged advisor networks, would love to see a whole re-thinking of these platforms. Can RIA custodians better balance 'strategic' additions with a diversity program to support newer & more diverse firms?

Q: Is there anything IN THIS for me AS an advisor on Schwab or TDA? What do I get out of them becoming more gargantuan?

A: Alas, probably not much. You can't get free-er than "free RIA custody". Tech is only more complex to build at such scale. Service is still hard to scale.

And that, again, is why most of the feedback & buzz I'm hearing from the advisor community is negative. What does #Schwabitrade DO for advisors? Not much I can see, at all, that isn't already there. Just less competition, less innovation, more custodian profits. Hello FTC?

/end