TD Ameritrade and Schwab Announce Merger

On November 29, 2019, The Charles Schwab Corporation announced an agreement to acquire TD Ameritrade, one of its largest competitors. Since our founding in 1998, Spinnaker Financial Advisors has chosen to custody our clients’ assets with TD Ameritrade (or one of its predecessors). At this point in time, we have a lot more questions than we do answers, but I’d like to share with you what we do know.

First, and most importantly, the two companies will continue to operate as separate companies until all of the legal and regulatory hurdles are cleared, and they come up with a plan and timeline for actually merging the companies. Many analysts believe this will take at least 1-2 years. In the meantime, your accounts will continue to be serviced by TD Ameritrade.

The custody business is a business that relies on technology and scale to be competitive. Most of the transactions that custodians perform, such as buying and selling securities, processing withdrawals, and setting up new accounts, are relatively simple and repeatable. Technology allows custodians to process millions of these transactions every day at a price that gets cheaper all the time. In October 2019, both TD Ameritrade and Schwab announced that they would no longer be charging a trading fee to transact stocks and ETFs.

The easiest way to grow in scale for a custodian is to acquire other custodians. This has been the case for both Schwab and TD Ameritrade over the years and explains why Schwab is acquiring TD Ameritrade. Together, the merged company would hold $5.1 Trillion in client assets, counting both their retail (do-it-yourself investors) and institutional (investors who work with a Registered Investment Advisor) divisions. This would make them the third-largest custodian behind Fidelity and Vanguard.

From the perspective of Investment Advisors, this merger would combine the two custodians who work with the largest number of advisory firms. Schwab currently has a relationship with 7,500 investment advisor firms and TD Ameritrade with 7,000. The next closest competitor is Fidelity, with 3,000 advisory firm relationships.

Before the firms start merging systems and people, they will need approval from regulators that could veto the deal if they deem that the new company is a monopoly. This is certainly a possibility that we will be watching.

Charles Schwab democratized the stock market in the early 70s by starting the first “discount broker” that made it possible for more individuals to participate in the markets. TD Ameritrade has long been a champion for fiduciary advisors like us and has always listened and responded to the needs of advisors so that we can provide better service to our clients. The increased scale and the combined wisdom of both companies give the merged company the potential to combine their best parts to provide a great offering to their customers. We certainly hope that this is the case.

It is also possible that the new mammoth will squeeze out the rest of their competitors, raise their fees, lower their service, shut down the senate, and create the first galactic empire. At this point, we don’t really know what to expect.

At the end of the day, we work FOR our clients and WITH our custodian, not the other way around. As we get more information about the intentions of post-merger Schwab, we will compare their offering to the other alternatives and make the best recommendation for our loyal clients.