Schwab's Mammoth Deal Has to Win Over the Little Guy, Too

(Bloomberg Opinion) -- It’s official: Charles Schwab Corp. has agreed to buy TD Ameritrade Holding Corp. for $26 billion in an all-stock transaction. Now the question on Wall Street is whether the acquisition, which would create a behemoth with $5 trillion in assets, will come under scrutiny from antitrust regulators. 

There are a number of arguments for an antitrust review. For one, Schwab is the market leader in safeguarding assets managed by registered investment advisers, holding about half the market. By purchasing TD Ameritrade, it would add another 15% to 20% share, according to a note from Keefe, Bruyette & Woods. The deal also could allow Schwab to boost fees on other services, or reduce interest paid to investors on their accounts. Effectively, the company eliminated commissions for U.S. stocks, exchange-traded funds and options, but that headline-grabbing move could very well mask hidden charges elsewhere.

Bloomberg News’s Felice Maranz and David McLaughlin compiled a roundup of analysts’ expectations. Cowen analyst Jaret Seiberg suggested regulatory scrutiny could stretch into the third quarter of 2020. UBS’s Brennan Hawken sees “a lot of execution risk.” Bank of America Corp.’s Michael Carrier said Toronto-Dominion Bank’s 43% stake in TD Ameritrade could cause “some complications,” including tougher regulatory approval.

While the potential hurdles are very real and Wall Street’s concern about them are valid, I’d add another concern: namely, that combining Schwab and TD Ameritrade could be considered “anti-trust” in a different way.

One of Schwab’s main competitors, Fidelity Investments, was quick to release a statement on Monday that piggybacked on some of these concerns, noting that "acquisitions of this size can be long, complex, and unsettling.” Kathy Murphy, president of Fidelity’s Personal Investing business, added this:

“Unfortunately for investors, the combination of Charles Schwab and TD Ameritrade means they will likely be doubling down on revenue practices that directly disadvantage investors, including paying extremely low cash sweep rates and taking significant payment for order flow. These practices can easily outweigh any benefit of $0 online commissions.”

Schwab’s path forward most likely lies in expanding its reach in financial advisory services. That’s a highly personal industry by nature. Sure, some people are willing to take financial planning into their own hands, or use algorithms to help them invest. But even with the internet democratizing all aspects of society, it still feels like the average person would want to have someone holding their hand as they lay out a strategy to buy a house, or send children to college, or save most efficiently for retirement. When it comes to bond markets, for instance, it’s clear that a good chunk of investors don’t have a good handle on what fixed income is all about.   

Walt Bettinger, Schwab’s chief executive officer, said in a statement that the combined firm will “be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys.” It’s an open question, though, whether Americans prefer to use a massive institution as a one-stop shop. As Cowen’s Seiberg pointed out, there’s something of a growing “anti-big business” sentiment focused on large banks and technology companies. Schwab would seem to be the cross-section of both of those targets.

Many details on Schwab’s acquisition and the potential synergies are still to come. But industry consolidation and the growing emphasis on technological innovation will clearly put increased pressure on its small and mid-sized competitors. For those firms, “the risk is that they lose market share, including in smaller communities where more personal brick-and-mortar financial services are harder to come by,” according to Bankrate.com senior economic analyst Mark Hamrick. 

I’ve written before about how finance industry professionals can easily get lured into sweeping generalizations. In the case of discount online brokers, the line is that no-fee trading is a big win for the consumer. “I’ve been on that pursuit, that mission basically for almost 40 years,” Charles Schwab (the founder) said after the company’s move to zero commissions. “We just hope more people will come and enjoy the benefits that Schwab provides.”

If successful, this combination will almost surely bring more investors under Schwab’s tent. It’s up to the company to convince them that even as an industry giant, it’ll always keep the little guy in mind.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

©2019 Bloomberg L.P.