ADVERTISEMENT

Schwab in Talks to Buy USAA Units to Diversify, WSJ Reports

Schwab in Talks to Buy USAA Wealth, Brokerage Units, WSJ Reports

(Bloomberg) -- Charles Schwab Corp. appears to be making a play to grab more advisory clients as fees fall for asset management and trading.

The San Francisco-based brokerage firm is in talks to buy USAA’s brokerage and wealth-management operations for roughly $2 billion, the Wall Street Journal reported Monday. The deal may be reached this month, the newspaper said, citing people familiar with the matter.

The potential transaction underscores the increasing race by asset managers to diversify amid competition to lower fees for trading and fund management. In March, Schwab introduced the first monthly subscription plan for clients. Vanguard Group Inc., the low-fee fund leader, is devoting more resources to offering advice and Fidelity Investments last year started offering zero-fee index funds.

“We’ve seen Schwab in general moving more in the direction of providing wealth-management and financial planning advice, more than just the DIY-investor platform,” Donnie Ethier, director of wealth management at Boston-based consulting firm Cerulli Associates, said. USAA’s clientele represent current and former members of the military who “tend to have a very strong culture and client loyalty and retention.”

Traditionally viewed as an adviser and broker to the masses, Schwab’s USAA deal would fuel expansion in an arena that’s seen as having better growth prospects and a higher return on equity than most other retail banking businesses.

In North America, personal financial wealth grew by nearly a quarter in the three years ending in 2018 to $90.3 trillion, according to a Boston Consulting Group report. Baby boomers are becoming increasingly dependent on money managers as they retire at a pace of 10,000 a day.

The advisory business is undergoing a sea-change as financial technology, such as robo-advisers and index funds, are transforming client needs and expectations, according Ethier, who has no direct knowledge of the potential transaction.

Representatives for Schwab and USAA declined to comment when reached by Bloomberg.

Schwab has been trying to increase the share of revenue and income from adviser services, which made up 27.7% of revenue and 30.4% of operating income for fiscal 2018, according to data compiled by Bloomberg. The majority of Schwab’s revenue last year came from net interest margin, or earnings from client cash deposits, a source that would be threatened by falling interest rates.

The potential transaction got a lukewarm reception from investors and some analysts.

USAA would add about 3% to Schwab’s total of $3.6 trillion in client assets, so “clearly not qualify as a transformative deal although is not insignificant,” Wells Fargo & Co. analysts led by Christopher Harris said in a note Monday.

Schwab shares climbed 0.4% to $40.30 in New York trading Monday. The stock has declined 3% this year, while an S&P 500 index of asset managers and custody banks returned 11%.

On July 12, Bank of America Corp. cut its Schwab rating to neutral from buy, citing a tougher revenue and margin outlook.

The company reports earnings tomorrow and will hold a business update call July 19.

The sale of its wealth management unit would help USAA focus more on its core insurance business, according to Cerulli’s Ethier. On July 1, it completed the sale of its asset management business to Victory Capital Holdings Inc. for $850 million.

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net;Devon Pendleton in New York at dpendleton@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, ;Pierre Paulden at ppaulden@bloomberg.net, Josh Friedman

©2019 Bloomberg L.P.