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The merger would create a brokerage giant with roughly $5 trillion in assets as the industry copes with zero commissions on stock trades.
More than 40 years ago, Charles Schwab pioneered discount investing — an upstart firm championing cheaper broker services for the little guy.
Schwab and other so-called discount brokers skipped the expensive advice that bigger, older firms offered. Average investors wouldn’t get much, but they wouldn’t pay much, either.
Since then, discount investing has proliferated as customers flocked to cheaper products, an evolution that has given rise to low-cost index funds, inexpensive exchange-traded funds and similar investments that probably power your retirement plan.
But today, even cheap is not cheap enough: Technological changes have given rise to automated portfolio advice from so-called roboadvisers, and a fresh wave of start-ups helped push many big firms — Schwab included — to drop many trading fees to zero.
With the planned $26 billion acquisition of TD Ameritrade that it announced on Monday, Schwab is aiming to solidify its place in the established order of the brokerage world as the industry faces a challenge: making more money without charging steep fees to customers managing their wealth.
“The move to zero commissions in the industry has put several firms in a really tough spot,” said Alois Pirker, research director at Aite Group, a research firm that tracks the financial services industry.
Schwab and Ameritrade together hold roughly $5 trillion in total assets. The new company would be the second-biggest by self-directed customer assets, behind Fidelity, which holds about one-third of that market, according to Cerulli Associates, a research firm in Boston. With TD Ameritrade, Schwab would control about 27 percent.
“This would create a true behemoth in the retail brokerage space,” Chris Allen, an analyst at Compass Point Research & Trading, said in a research note.
Intense competition has been driving investment costs lower for years. But last month, the price war reached a new level when Schwab said it would eliminate fees for trades of stocks and exchange-traded funds; other rivals, including TD Ameritrade and E-Trade, were forced to follow suit.
For Schwab, eliminating commissions cost perhaps $100 million a quarter, or roughly 4 percent of overall revenue, the firm said. But for other firms the loss of that revenue created a much larger dent.
Schwab, Mr. Pirker said, had been diversifying its businesses away from trading revenue over the past decade. “A couple of years ago, they started calling itself a full-service firm — delivering financial planning and advice in general,” he said. “And the diversification of revenue has gone hand in hand with it.”
Under the terms of the agreement announced Monday, TD Ameritrade’s stockholders would receive 1.0837 Schwab shares for each TD Ameritrade share — a 28 percent premium over TD’s stock price on Nov. 20, the day before talks of the deal were first reported.
Schwab’s president, Walt Bettinger, called the deal a “unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution.”
The deal will enable Schwab to increase its retail customer base, while cutting expenses: Schwab will gain a further 12 million retail customers, bringing its total to 24 million. That would catapult the combined firm’s customer count just ahead of Fidelity, which has 22 million retail clients. But Fidelity still manages about $2.3 trillion in retail assets alone, versus the combined firm’s estimated $1.9 trillion, according to Scott Smith, director of advice relationships at Cerulli.
Fidelity — perhaps not surprisingly — called the combination a poor deal for consumers.
“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,” said Kathleen Murphy, president of Fidelity Investments’ personal investing business, in a statement.
Several analysts said that the industry had expected E-Trade to be scooped up by a larger player first. The last major deal was three years ago, when TD Ameritrade acquired Scottrade in a $4 billion transaction.
“Consolidation has been an uneven trend in this space,” said Stephen Biggar, director of financial institutions research at Argus Research. “When you get down to a few large players, I think it becomes less likely.”
The deal could have consequences for investors even if they don’t have direct accounts with Schwab or Ameritrade, because of the services the firms provide other financial professionals.
The companies are among the largest service providers to independent registered investment advisers: They hold customer assets, execute and clear trades and handle much of the administrative work that goes along with it.
Schwab is already the largest so-called custodian, with $1.8 trillion in assets managed by registered investment advisers; it controls roughly half of the market, according to Keefe, Bruyette & Woods, an investment bank that specializes in financial services. Ameritrade now ranks as the third-largest player, with up to 20 percent of the market. Fidelity is in second place.
“We think this deal may face somewhat significant antitrust hurdles,” Kyle K. Voigt, an analyst at K.B.W., said in a research note, “depending on how the competitive market is viewed by relevant authorities.”
Smaller investment advisers who work with TD Ameritrade — like George Papadopoulos, a certified financial planner in Novi, Mich., who manages $49 million in customer assets — worry that Schwab will decide it has no place for them.
Mr. Papadopoulos said Schwab turned him away when he was just starting out almost two decades ago. And several of his colleagues who are still in the early stages of building their own firms have found a home at TD Ameritrade, he said.
“What will happen to them?” Mr. Papadopoulos said. “We are used to lower levels of service so we expect that to continue, of course. But at what point will Schwab decide that the advisers with less than a certain amount of assets under management should belong in the fold or let them go?”
Schwab — now based in San Francisco with more than 19,000 employees and $3.85 trillion in assets — grew out of a biweekly investing newsletter created in 1963 by Charles R. Schwab, who remains the firm’s chairman. At its height, the newsletter had 3,000 subscribers who paid $84 annually, and it eventually evolved into the discount brokerage firm it is today, according to “Invested,” Mr. Schwab’s memoir published this year.
The newsletter business floundered for a while, and required cash infusions from family members. But a revolutionary regulatory change in 1975 — a ban on fixed brokerage commissions — helped Schwab’s firm, and others like it, challenge the status quo.
There were a few brokerage firms competing aggressively at that time, Mr. Schwab wrote, and one was led by Joe Ricketts, whose business would ultimately become Ameritrade.
Today, he wrote, they are friends: “I think Joe Ricketts and I agree that our fierce competitiveness nearly 30 years ago is proof that market competition can be a source of miraculous innovation.”
Stephen Grocer contributed reporting.