It was only a matter of time and the time appears to have come in the online brokerage industry as Charles Schwab, the original discount broker, has confirmed it will acquire TD Ameritrade in a deal valued at $26 billion. Schwab laid down the gauntlet in early October by eliminating trading fees for stocks and ETFs. TDA, E*TRADE, Interactive Brokers, and Fidelity all followed. But judging by investor reaction, TDA, which lost nearly 30% of its market value the day Schwab announced it would eliminate commissions, appeared to be vulnerable.

In an interview with Investopedia, Charles 'Chuck' Schwab, told us that his eponymous firm has wanted to eliminate commission for years as they are, '...an encumbrance to bringing people into investing." Schwab told us that his firm has other ways of making money, and indeed it does. The company pulled in more than $10 billion in revenue in 2018, and over $3.3 billion in net income. Eliminating trading fees would cost the firm $80-100 million a year, but since Schwab is really a bank with over $3.7 trillion in assets and 18 million customers, it could take the hit.

Terms of the Deal

Schwab is acquiring TD Ameritrade in an all-stock transaction valued at approximately $26 billion, according to a press release. Under the agreement, TD Ameritrade stockholders will receive 1.0837 Schwab shares for each TD Ameritrade share, which represents a 17% premium over the 30-day volume weighted average price exchange ratio as of November 20, 2019.

Schwab President and CEO Walt Bettinger said, “We have long respected TD Ameritrade since our early days pioneering the discount brokerage industry, and as a fellow advocate for investors and independent investment advisors. Together, we share a passion for breaking down barriers for investors and advisors through a combination of low cost, great service and technology."

Regulatory Hurdles

A buyout of one behemoth in the online brokerage industry by another will inevitably bring on an anti-trust investigation. According to a note to clients sent by analyst Kyle Voigt of Keefe, Bruyette & Woods, Schwab has  approximately 50% of registered investment advisor (RIA) custody assets and TD Ameritrade has between 15% - 20%. Creating an entity that could comprise nearly three quarters of a market could be problematic.

If the deal does go through, the combined companies would boast nearly 30 million customers around the world. Speculation is already swirling as to the fates of smaller competitors like E*TRADE, Interactive Brokers, and TradeStation, as well as upstarts like Robinhood. With fees now history, online brokers need to generate revenue through other products like traditional banking, loans, and advisory services. Schwab has all of that, and while TDA was trying to build itself into a full services financial firm, the path has been arduous.

Fidelity, which is privately held, is still the giant in the space with 27 million customers and $6.8 trillion in assets under management. It is a full service financial institution that was born out of the democratization of investing in the 1940's. It has the money and the brand to buy up or take out its competitors without the scrutiny of shareholders. Vanguard, the original index fund giant, is also privately held. It is less acquisitive than its competitors, but if we see a Schwab TDA marriage, anything can happen.

While we are just in the early days of the online broker battle under the cloud of zero commissions, things just got very real, very quickly.

Stay tuned.