If the deal were agreed it would accentuate Charles Schwab's dominant market position in a sector seeing strong price competition.

(Updates with reaction from Celent)

Charles Schwab is talking to TD Ameritade over an acquisition that could consolidate the discount-brokerage market, part of the North American wealth management sector that is witnessing fierce price competition, reports said.

The Wall Street Journal yesterday reported that the firms have held talks for months and were close to a deal yesterday although there’s no guarantee of a deal, according to an unnamed source. Assuming a deal goes ahead, it would value TD Ameritrade at around $26 billion.

In this environment, in which low-cost “passive” entities such as exchange-traded funds have flourished at the expense of more “active” funds, margins have been compressed, driving a need for economies of scale. Such pressures could intensify if the US economy slows in 2020.

The high-scale/low margin end of the wealth industry  contrasts with the high-fee/fat margin business seen in areas such as private equity, ultra-HNW private banking, and other models. Some have likened this shape of the financial sector to a “barbell”.

Besides its renowned brokerage business, Charles Schwab works with RIAs and other wealth providers via its Schwab Advisory Services arm. Charles Schwab moved to a subscription-driven financial planning option for its digital advisory service. And the firm holds a major conference annually, its IMPACT event, with the most recent at the start of November.

Meanwhile, on the higher ends of the wealth spectrum, last April Family Wealth Report reported that Charles Schwab is ramping up its efforts to serve the family offices industry, a move that pits it against the likes of Fidelity Investments.

As reports said, an M&A deal involving TD Ameritrade will increase San Francisco-based Charles Schwab's status as the dominant market player. It is the largest discount broker in the US, and TD Ameritrade, based in Omaha, Nebraska, comes second. Charles Schwab has $3.85 trillion in client assets, as at October 31, 2019, according to its website. TD Ameritrade had more than $1.0 trillion, its website said.

The WSJ said that such a merger would draw regulatory scrutiny over concerns about threats to competition, although new entrants and digitally-driven business models mean a monopoly is unlikely to arise - in some ways the landscape is becoming more, not less, competitive.

Getting hot
Price competition is intense. TD Ameritrade announced on October 1 that its US brokerage firm will eliminate commissions for its online exchange-listed stock, ETF (domestic and Canadian), and option trades, moving from $6.95 to zero. Clients trading options will now pay $0.65 per contract with no exercise and assignment fees.

Charles Schwab has been on the acquisition trail this year. On July 25 it agreed to buy assets of USAA’s Investment Management Company, including brokerage and managed portfolio accounts for $1.8 billion in cash. The companies have also agreed to enter into a long-term referral agreement, effective at closing of the acquisition, which would make Schwab the exclusive wealth management and brokerage provider for USAA members.

In its third-quarter 2019 results, Charles Schwab said that net income, at $951 million, had risen by 3 per cent from $923 million for the third quarter of 2018. Net income for the nine months ended September 30, 2019 was $2.9 billion, up by 11 per cent from the year-earlier period. TD Ameritrade, meanwhile, logged net income of $551 million for Q3, up from $454 million a year before.

Implications
William Trout, who is head of wealth management at Celent, the consultancy, spoke to this publication about whether such a merger also puts a spotlight on centralization of RIA custodians. Such centralization could prompt a push for self-service, and sharing of tools between clients and advisors and back-office/custodians.

Another issue is a picture of shrinking choice and having to put up with less than state-of-the-art technology, for which the custodians will increase charges.

"I fully expect custodians to start billing RIA’s for trade order flow, etc. as part of a response to the impact of zero commissions on the bottom line. I also foresee consolidation in the RIA space. This market is just too fragmented and advisors are going to find themselves caught between consumers, who have more choice, and their custodial masters, who have more power," Trout said.

This trend will be accelerated by the fact that RIA’s are not using tech as they should be: I saw a study recently that noted only 12 per cent of RIA’s are using some sort of digital advice or hybrid robo solution with their clients," Trout added.