Last week I was planning a trip to watch my younger daughter compete in a horse show in Birmingham when the news broke about Charles Schwab acquiring TD Ameritrade. For those of you who don’t have fragile but determined children who ride stout but stupid equines over fences, a hunter/jumper competition typically means hundreds of miles of travel and days of standing around in moderately bad weather to watch your dearest risk paralysis for a few minutes in the saddle. It’s 99% utter boredom punctuated by brief moments of tangible panic. In other words, it’s not unlike the relationship most RIAs have with their custodian.
Custodial relationships were boring until last week. By now you’ve read plenty about the Schwab/TD Ameritrade deal. Some have questioned whether or not the transaction will be prohibited by anti-trust regulation, but – in the current political environment – I wouldn’t count on that. Together, SchwabiTrade will custody on the order of 75% of RIA assets, and while some RIA pundits are concerned about the service that RIAs, especially smaller ones, will receive from such a behemoth, they might also want to look into the cost of these relationships, not to mention what Schwab’s end-game really is.
If RIAs were David and the wirehouse firms were Goliath, Schwab engineered the slingshot.
Schwab is credited with helping create the RIA space, having launched Schwab Advisor Services over 25 years ago effectively as a plug-and-play custodial offering for independent advisors. If RIAs were David and the wirehouse firms were Goliath, Schwab engineered the slingshot. Schwab relentlessly drove down the costs of its RIA backbone over the years, embracing technology and efficiency to build scale and lower fees. There was room for Schwab and TD Ameritrade (its longtime competitor in serving RIAs) in the investment management space, but that was when the industry was expanding and margins were widening. Now zero commissions and cheap money may be prompting a new plan of action for Schwab that extends beyond this merger. David may be facing a new Goliath.
The last decade has been witness to oligopolistic consolidation and consequent behaviors across many service industries. Amazon upended retail. Uber (and Lyft) decimated local cab companies and car rental companies. Airline consolidation has raised fares and cut service for many markets, including my hometown. Without debating the merits or evils of creative economic destruction, what is indisputable is that the rise of modern oligopolies has been tough on incumbent industry stakeholders: owners, workers, and (sometimes) customers.
It’s hard to see the advent of SchwabiTrade as a good thing for the RIA community – especially the wealth management community. If Schwab is looking to recapture margins from zero commission trading and low rates on sweep accounts, it need look no further than the ten thousand plus RIAs now in its eco-system. Changes will likely be slow and subtle, kind of like how the airlines gradually devalue frequent flyer miles while touting “improvements” to their loyalty programs. Fees drift up. House brands replace independent products. Service declines. And, eventually, Schwab finds a way to go straight at RIA clients – with proprietary technology and their own advisor force. The best thing for Schwab is that they can use revenues from the RIA community to fund the strategy, and they have control of the data to know what will work most effectively.
Schwab may not be successful. The sequel to most real-life versions of “The Empire Strikes Back” is indeed “Return of the Jedi.” WeWork’s abject failure is probative insight into the folly of oligopolistic thinking in industries that cannot be cornered, like office space. The advisor community is vast and nimble. Schwab has a huge market share, though, and a forty-year head start. That’s worrisome.
Can RIAs escape this by moving to the Fidelity platform, or BNY Mellon, or Raymond James? It’s worth looking into, and no doubt this moment is a huge opportunity for other custodians to grab market share. After the dust settles, though, if Schwab increases fees to “remain competitive,” others will at least try to follow.
Real economic profits attract competition.
And this isn’t the only existential threat facing wealth management. Goldman Sachs is trying to figure out how to extend their brand to the mass-affluent, and they aren’t the only private bank pursuing this. Other discount brokers and robo-advisors are trying to move upmarket. Suddenly, it seems like everyone has noticed that the stickiest revenue and most reliable margins in the investment community are wealth management firms. Real economic profits attract competition.
None of this offers a very upbeat message for Thanksgiving week in an industry that has enjoyed considerable success in recent years. We should all be grateful for the opportunities afforded by a great business. My concerns may be alarmist and unfounded. But I couldn’t stop thinking about how abrupt the advent of SchwabiTrade is as I was sweeping the leaves off my windshield last weekend. This is probably the biggest news to hit the RIA community in 2019. If we’re not paying attention, we’ll all be driving blindly.