In yet the latest shake up in the online brokerage industry, E*TRADE, one of the original internet brokers, is being sold to legacy Wall Street bank Morgan Stanley in an all-stock deal worth $13 billion. With five million retail customers and $360 billion in assets, and an online bank, E*TRADE will bring new customers into Morgan Stanley’s traditional world of lending and securities trading. The combined companies will have $3.1 trillion in client assets, 8.2 million retail client relationships and accounts, and 4.6 million stock plan participants.
The future of E*TRADE was uncertain after Schwab announced it would acquire TD Ameritrade for $26 billion last fall. That announcement, in tandem with most major online brokers eliminating trading fees for stocks and ETFs, changed the landscape for online brokers and made size matter once again. The combination of Morgan Stanley and E*TRADE puts the former’s wealth advisor-driven model hand in hand with the latter’s direct-to-consumer, digital-first model at a scale that can go head to head with Schwab/TDA.
Mike Pizzi, the CEO of E*TRADE, will stay on to run the online broker under Morgan Stanley’s umbrella and will join its management team, reporting to CEO James Gorman, according to a press release. “By joining Morgan Stanley, we will be able to take our combined offering to the next level and deliver an even more comprehensive suite of wealth management capabilities. Bringing E*TRADE’s brand and offerings under the Morgan Stanley umbrella creates a truly exciting wealth management value proposition and enables our collective team to serve a far wider spectrum of clients,” Pizzi said.
For Morgan Stanley, the purchase of E*TRADE allows it to diversify its revenue streams away from asset management, lending, and securities trading. According to the company, upon integration the combined Wealth and Investment Management businesses will contribute approximately 57% of the firm’s pre-tax profits, excluding potential synergies, compared to only approximately 26% in 2010. The acquisition will also bring about $400 million in cost savings from what the firms describe as, ‘…maximizing efficiencies of technology infrastructure, optimizing shared corporate services and combining the bank entities, as well as potential funding synergies of approximately $150 million from optimizing E*TRADE’s approximate $56 billion of deposits."
The acquisition is expected to close in the fourth quarter of 2020.
However, the deal will still need to pass regulatory scrutiny, and even if it does, there will likely be uncertainty for financial advisors who use E*Trade’s custodial services for their clients. Michael Kitces from XY Planning, said in a series of tweets that if E*Trade closes or is forced to shutter its Advisor Services business, there will be even fewer custodial brokers for RIAs in light of Schwab’s acquisition of TDA. "...Morgan Stanley acquisition of E*Trade and potential loss of E*Trade Advisor Services as a viable RIA custody competitor puts even MORE pressure on the #Schwabitrade deal. Only a coterie of small-RIA custody options left, and even fewer competitive choices for large RIAs."