Schwab's reported TD Ameritrade deal leaves 10,000 RIAs in twilight zone as weekend begins with an unconfirmed, undenied merger report causing many to weigh options

Several thousand RIAs who use TD Ameritrade Institutional enter the weekend dumbstruck that Chuck Schwab may soon be their Daddy after decades of using the Jersey City, N.J.-based custodian expressly because it was not Schwab Advisor Services.

About 3,500 RIAs use TD as a sole custodian, while hundreds, and more likely thousands, of TD's more than 7,000 total RIA clients use TD in conjunction with Schwab. 

Now they've been befallen by a massive betrayal by TD at worst, or a capitalistic harsh reality at best--pick your own reality. 

 The news that Charles Schwab Corp. is acquiring TD Ameritrade Holding Corp. is all the more surreal for dribbling out through a leak that remains neither confirmed -- nor denied. See: Reported Schwab-TD merger is a 'blockbuster' combo that creates a 10,000-RIA, $2-trillion custody juggernaut and may signal long-expected industry shakeout

The news of the mega-merger was broken in some detail by CNBC, and the official notice was expected to land later yesterday (Nov. 22). Reports today say the deal hit a last-second snag at the board level, Fox News reporter Charles Gasparino reported in a tweet. 

From the perspective of many RIAs, the news is unthinkable.

"Say it isn't so, my beloved TD purchased by Schwab? I am completely in shock at the likely change in culture from that we've enjoyed at TD Ameritrade," writes Debra Morrison, on LinkedIn, a financial planner for $70-million New Jersey RIA, Empowered Retirement. See: One big casualty of Fidelity Investments' buckle on zero-fee commissions may be the zero-fee RIA custody tailwind of three decades duration

Taking action

This outcry is indicative of RIAs who know how deals play out in the financial industry.

"The zero-sum game of this type of M&A has to take a bite out of someone. I suspect the advisors are on the plate," writes Nick Richtsmeier on LinkedIn, a founder and president of Des Moines, Iowa marketing consultancy, CultureCraft, and a former member of TD's national advisory council, .

If the deal is real, Ron Tamayo promises in an RIABiz interview, he'll take action.

“If the merger is approved, we’re adamant that we’ll be looking for another custodian,” says the principal with Moisand Fitzgerald Tamayo LLC in Orland, Calif., which manages $630 million in assets. 

Right now, 70% of his firm’s assets are with Schwab and 30% are with TD Ameritrade and he wants clients to be able to choose between at least two custodians.

Barry Rhonemus refuses to rule out dumping TD and Schwab wholesale if the deal happens.

"If you find yourself feeling like certain clients are a burden, you shouldn't be working with them," says the founder of $200 million AUM Scottsdale, Ariz RIA, Juncture Wealth Strategies, which recently joined the $6 billion AUM LPL OSJ, Integrated Partners,

"Anyone who tells you they 'like' service cuts would be lying," he says. 

Irony runs deep

Though all mergers take victims, a Schwab-TD combination is laden with incongruity, explains Michael Kitces, founder of the Bozeman, Mont.-based XY Planning Network, and writer of the popular Nerd's Eye View Blog, via email. See: After Vanguard instigated commission war in June, Charles 'Chuck' Schwab steps up to challenge in brilliant counterstroke that paints bull's eye on custody rivals in zero-sum showdown

"It's ironic that for years, TD took the ‘small’ cast-offs who couldn’t get onto the Schwab (or Fidelity) platform due to minimums, and now the news is out ... Schwab is buying TD."

The irony runs deeper than that, says Tim Welsh, president of Larkspur, Calif.-based consultancy, in an email from Australia.

"TD culture in one sentence is:  We have a single mission of out-servicing and out-innovating Schwab."

That try-harder service could well go extinct -- or worse, Kitces adds.

"[They'll] likely get bottom tier Schwab service teams and little other support. 'Schwabatrade' is already raising worries [among] 'smaller RIAs with less than $100 million, and especially less than $20 million at TD, that once Schwab pulls them in, they'll get 'kicked off' for being too small."

Bigger RIAs tend to have a more sympathetic view of the Schwab-TD merger.

Carson Group Holdings LLC, which has $11.5 billion in assets, held both at TD Ameritrade and Fidelity, may not make changes related to the deal, says its CEO, Ron Carson.

“…We fully expect to see major continued consolidation across financial services. The profession is beginning to realize we don’t need 50,000 trading departments, research departments, marketing departments or compliance departments.”

Carson calls this, “the biggest deal of the year.”

Peter Mallouk, president of Creative Planning, which manages $40 billion-plus is also circumspect. He splits custody between Schwab and TD.

"It will likely be bumpy for a while, but when it gets going, there are clear synergies that should eventually lead to all sorts of positives," he says. "Over the long run, though, there is one less formidable competitor and it will be interesting to see what it means for the end clients and RIAs.”

“From our point of view, it’s less competition and in our opinion, that’s not good," he says. "We comply with the best execution and if the merger goes through we’ll be down to one custodian and looking for another very quickly. Choice is very important to us."

Changing landscape

It's also a matter of bargain shopping as a fiduciary.

Zero commissions aside, costs vary from custodian to custodian, Tamayo contends. For instance, individual bonds often carry a spread, which can differ widely, he says.

Yet though the reactions of Tamayo and other RIAs to this merger news is understandable, it is much less impactful than it might have been five or 10 years ago, says Scott Smith, an analyst with Boston-based Cerulli Associates. 

“We should keep in mind this isn’t a major reduction in the RIA marketplace. We’re seeing additional competitors all of the time. We’ve seen LPL and Raymond James and all of the technology platforms are changing things too.”

Indeed, only today startup RIA custodian, Altruist, announced it raised an $8.5 million of series A funding, led by Venrock, originally the venture capital arm of Rockefeller. John Scianna, vice president of brand and design at the LA-based startup, called it a hold-the-door announcement.

"We're getting flooded with requests; we can't launch soon enough. Our first alpha testers of the brokerage platform come on board early next month."

The risk is high and Schwab may have slammed the door shut on new custodians, Eric Clarke, CEO of Orion Advisor Services

"With the strong brand recognition and zero trading fees at both Schwab and Fidelity, its hard to see how new startup custodians survive," he says. "At the point of sale, independent advisors leverage trusted custody brands to create trust and help close prospects - and now they have no incentive from a pricing perspective to go anywhere else."

There's been added interest at TradePMR, says Robb Baldwin, founder and CEO of the custodian, which has tight ties to Wells Fargo. See: Wells Fargo finally gives its 600 hiring managers an RIA channel to sell but still with the Trade-PMR brand

"We have been getting more inquiries than usual in light of the TD/Schwab reports of a merger," he says in an email. "Our advisor communications team is in talks with a number of advisors who are interested in TradePMR's solution. We continue to field calls and speak with quality advisors..."

In fact, Brian Bischoff, an advisor in Greenwood Indiana left Charles Schwab two years ago in favor of TradePMR, and says being at a smaller custodian was a big part of his decision.

Bischoff runs Bischoff Wealth Management, whose firm manages $167 million in assets, liked the idea of being a bigger fish in a smaller pond at Trade PMR. See: Trade-PMR is elbowing its way into the RIA custody market with cheap software and expensive advertising slots

“Schwab is a good firm and there are good people who work there. We felt Trade PMR fit our client base and our size of firm a little better than Schwab did. Schwab focuses on catering to the $1 billion + RIA,” he says.

Bischoff adds: “They are nimble and can quickly make changes. “When we left Schwab, we just felt we had a better fit with TradePMR. I can pick up the phone and talk to Rob Baldwin. We’re one of the larger advisors there.” 

Scale play

For Schwab, the scale will be a significant advantage, Smith says. 

“They have great plumbing and infrastructure and banking products. This opens it up to a whole new market. It’s always difficult to integrate. This is a scale play. There will be a lot of work to do. It’s an opportunity in and of itself, but it’s also a challenge, but firms of this scale aren’t afraid of a challenge.”

Keep an eye out for other titanic players to counter-punch Schwab, says Tom Bradley, ex-TD Ameritrade heads of RIAs and head of retail investments. 

"A big strategic player like Goldman Sachs or BlackRock could come in and buy an E*Trade to compete with a behemoth like Schwab."

Bradley adds that Schwab disclosed in 2018 that it still gets 18 basis points on RIA assets with only about half of that going to expenses -- an attractive ratio that is bound to attract competition.

Less obvious is how much non-custodians have already usurped custodians as controllers of the RIA desktop -- making a custodial choice less relevant, Smith adds.

"Keep in mind how other service providers -- Envestnet, Orion, etc.-- are entering the space to provide alternative options for RIA custody shops with integrated technology platforms that offer everything from account opening and financial planning straight through to portfolio management," he says.

 "So while we are potentially losing one of the larger current competitors, innovation elsewhere will continue to offer an expanding field of opportunity for RIAs to choose a platform that fits them best. "

Wirehouse woes

That said TD Ameritrade's sponsorship of open API Veo is a big deal that could be wiped away.

"That is a big deal," says Joel Bruckenstein, principal of T3 in an email. 

"With the benefits of zero trading fees, advisors should be able to recruit breakaways at a faster clip than ever before. This deal should concern wirehouses more than any other in this industry.” 

He adds: "Independent advisors still have awesome choices. Expect to see more innovation to support advisors and with trading costs at zero."

The merger also gives RIAs impetus to look for partners that will stay independent, Tamayo says.

“Part of the dynamic with Schwab and TD Ameritrade has always been their flirtations with being our competitor," he says.

"Schwab has really pushed the envelope [in simulating RIA-level wealth management]. There is that competitive aspect that we don’t see that with Pershing. Pershing is different and they’re an institutional clearinghouse. That would be appealing to us.”