In a deal that would merge two of the largest online brokerages, Charles Schwab announced it will buy TD Ameritrade for $26 billion.
The combined firm is expected to serve more than 24 million client accounts, totaling more than $5 trillion in assets from both brokerage businesses, as well as custodial assets from thousands of registered investment advisors. The move comes on the heels of a pitched battle among online brokers to reduce trading commissions to $0, which started when Schwab dropped its commission in October. TD Ameritrade and most major online brokerages quickly followed suit.
“We believe the combination of our two great companies positions us to be competing and winning in the investment services business for the long run—the very long run,” Schwab CEO Walter Bettinger said in a press release. The combined firm will be run by Bettinger.
What account holders can expect
For the moment, nothing. The deal still needs to face regulatory approval before it closes, which could take a year. Following that, Schwab says full integration of the two firms will take between 18 to 36 months.
TD Ameritrade is known for its broad investment selection, powerful trading platforms and other technical innovations, such as using artificial intelligence for customer support. Charles Schwab is a major player in the mutual fund and retirement market. Together, the combined firm aims to cover the breadth of consumer financial services, including banking, trading and long-term wealth management.
Analysts say the merger throws a lifeline to TD Ameritrade, as the online brokerage depended on trade commissions for profitability, while Schwab makes more from holding client accounts. Like other brokers, Schwab earns interest on uninvested client cash.
The combined firm will offer greater cost savings while being able to expand offerings to a broader client base. According to the company’s release, the acquisition could cut costs of up to $2 billion, some of which Schwab could pass on to consumers.
What’s next from discount brokers
The recent trend of eliminating commissions led to speculation that a wave of consolidations may hit the industry, and the merger of TD Ameritrade and Charles Schwab is the first. Others may follow: For example, there has been talk for years that E-Trade may be in line for a merger.
Once the Schwab-TD Ameritrade deal goes through, competitors are likely to struggle to cut expenses and gain market share to compete with the behemoth that will be created by the merger. Analysts say the brokerage industry may move to add more banking and wealth management services as a key differentiator to gain additional clients and revenue. Interactive Brokers recently filed paperwork with plans to launch its own industrial bank, based in Utah.
In the meantime, brokers are likely to continue to reduce fees for trading and investment management. But one potential downside of continued consolidations: Fewer choices for consumers and the potential loss of a competitive landscape that led to this “race to zero” in the first place.