Charles Schwab and TD Ameritrade: A Mammoth Merger

In this era of fierce competition in the discount brokerage space, scale might be the best recipe for success.

Charles Schwab has once again sent shockwaves through the financial services industry, announcing its intent to acquire TD Ameritrade. The all-stock deal — valued at approximately $26 billion — will see the two biggest publicly-traded discount brokers combine into a giant entity with over $5 trillion in client assets.

Today we dive into the history of these two companies, and what effect recent events may have on the financial services industry.

The Evolution of Charles Schwab

1975 – U.S. Congress deregulated the stock brokerage industry by stripping the NYSE of the power to determine the commission rates charged by its members. Discount brokers, which focused primarily on buying and selling securities, seized the opportunity to court more seasoned investors who might not require the advice or research offered by established brokers. It was during this transitional period that Charles Schwab opened a small brokerage in San Francisco and bought a seat on the New York Stock Exchange.

1980s – The company experienced rapid growth thanks to a healthy marketing budget and innovations, such as the industry’s first 24-hour quotation service.

This fast success proved to be a double-edged sword. Charles Schwab became the largest discount broker in the U.S. by 1980, but profits were erratic, and the company was forced to rescind an initial public offering. Eventually, the company sold to BankAmerica Corporation for $55 million in stock. A mere four years later, Charles Schwab would purchase his namesake company back for $280 million.

1987 – By the time the company went public, Charles Schwab had five times as many customers as its nearest competitor, and profit margin twice as high as the industry average.

1990s – In the late ’90s, Charles Schwab moved into the top five among all U.S. brokerages, after a decade of steady growth.

2000s – The company made a number of acquisitions, including U.S. Trust, which was one of the nation’s leading wealth management firms, and most recently, the USAA’s brokerage and wealth management business.

The Race to $0

For Charles Schwab, the elimination of fees is the culmination of its founder’s vision of making investing “accessible to all”.

The company’s fees were slowly declining for decades. In late 2019, it finally took the plunge and introduced free online trading for U.S. stocks, exchange-traded funds, and options. The response was immediate and enthusiastic, with clients opening 142,000 new trading accounts in the first month alone.

Although Charles Schwab sent rivals scrambling to match its no-commission trade offer, fintech upstarts like Robinhood have offered free trading for years now. The “race to zero” reflects a broader generational shift, as millennials are simply more likely than earlier generations to expect services to be free.

The Evolution of TD Ameritrade

1975 – The origin of TD Ameritrade can be traced back to First Omaha Securities, a discount broker founded by Joe Ricketts. The company changed its name to TransTerra in 1987.

1988 – TransTerra’s subsidiary, Accutrade, was the first company to introduce touch-tone telephone trading, a major innovation at the time and one of the first early forays into automation.

Early 1990s – Ricketts’s willingness to integrate emerging technologies into the trading business helped his companies achieve impressive growth. In 1997 the company acquired K. Aufhauser & Co., the first company to run a trading website.

The Internet wasn’t a puzzle. We were crystal clear from the beginning that customers would migrate to this.

– Joe Ricketts (2000)

Late 1990s – The Ameritrade brand was solidified after the company changed its name from TransTerra to Ameritrade Holding Corporation in 1996. The newly named company completed an IPO the following year, and established its new brand Ameritrade, Inc., which amalgamated K. Aufhauser, eBroker, and other businesses into a unified entity.

2000s – Ameritrade entered the new millennium as the fifth largest online investment broker in the United States, fueled in part by marketing deals with AOL and MSN.

The modern incarnation of TD Ameritrade took shape in 2006, when TD Bank sold its TD Waterhouse USA brokerage unit to the Ameritrade Holding Corporation in a stock-and-cash deal valued at about $3.3 billion. At the time of the deal the new company ranked first in the U.S. by the number of daily trades.

2016 – TD Ameritrade acquired the discount brokerage Scottrade for about $4 billion. The deal brought 3 million client accounts and $170 billion in assets under management into the company, and quadrupled the size of its branch network.

What Comes Next?

Naturally, the announcement that these massive discount brokers plan to merge has generated a lot of speculation as to what this means for the two companies, and the broader brokerage industry as a whole.

Here are some of the consensus key predictions we’ve seen on the deal, from both media and industry publications:

• After the deal is approved, the integration process will take 12 to 18 months. The combined company’s headquarters will relocate to a new office park in Westlake, Texas.
• Charles Schwab’s average revenue per trade has dropped nearly 30% since Q1 2017, so the company will likely use scale to its advantage and monetize other products.
• The merged company will continue to adopt features from fintech upstarts, such as the option to trade in fractional shares.
• E*Trade, which was widely considered to be an acquisition target of Schwab or TD Ameritrade, may now face pressure to hunt for a deal elsewhere.

Even though these longtime rivals are now linking up, stiff competition in the financial services market is bound to keep everyone on their toes.

I think Joe Ricketts and I agree that our fierce competitiveness nearly 30 years ago is proof that market competition can be a source of miraculous innovation.

– Charles Schwab

Globalisation is a rising tide that lifts all boats.

In an increasingly connected world, countries are engaging with global markets more than ever before. As a result, global wealth is shifting towards emerging markets. This megatrend—a global trend with sustained impacts—is profoundly influencing everyday life, society, and business.

Shifting Economic Power

Today’s infographic from iShares by BlackRock explains how emerging markets are classified, along with which countries are growing the fastest—and how investors can follow the money.

What Is An Emerging Market?

Every economy goes through five distinct stages of growth:

1. Traditional Society: Based on primary industries, such as subsistence farming.
2. The Pre-Conditions of Take-off: Spread of technology creates a more productive agricultural economy.
3. Take-off: Industrialisation begins, and technological breakthroughs occur.
4. Drive to Maturity: More complex manufacturing, and large-scale infrastructure investment takes place.
5. Age of Mass Consumption: Urban society and a tertiary industry dominate, as disposable income grows.

Source

Emerging markets fall into the transitory stages between ‘Take-off’ and ‘Drive to maturity’ as their economies modernise. Today, such countries offer lots of promise, but also come with a range of challenges:

• Pro: Greater return potential, growing middle class, increasing consumption
• Risk: Political instability, lack of infrastructure, lack of market access

Between 2000–2018, emerging markets’ share of global wealth has more than doubled from 10% to 24%. China is a major player in this transformation.

China’s Economic Might

China’s impressive trajectory from agricultural economy to global superpower cannot be ignored. The nation is on track to overtake the U.S. in terms of gross domestic product (GDP, nominal) by the year 2030.

Year	🇨🇳 China GDP	🇺🇸 U.S. GDP
2000	$2.2T	$12.6T
2010	$6.1T	$15T
2018	$10.8T	$17.8T
2020E	$16T	$20.2T
2030E	$26.5T	$23.5T
2040E	$36.6T	$28.3T
2050E	$50T	$34.1T

China’s enormous growth has a ripple effect on its GDP composition. A more affluent middle class is buying higher-priced discretionary goods—such as cars and electronics—boosting the country’s domestic consumption.

Investors must keep an eye out for other emerging markets that are emulating China’s example.

One Piece Of the Puzzle

China is just one case study—several other economies are also making strides on the world stage. Each country brings unique advantages, but also barriers to overcome.

Country	Real GDP Growth (2019E)	Strengths	Weaknesses
🇮🇳 India	7.4%	✔ Rapidly growing economy ✔ Vast working-age population	✘ Red tape ✘ Lack of infrastructure
🇨🇳 China	6.2%	✔ Good infrastructure ✔ High R&D spending	✘ Ageing population ✘ High debt
🇮🇩 Indonesia	5.1%	✔ Cheap labour ✔ Diversifying economy	✘Wide income gap ✘ Lack of infrastructure
🇲🇽 Mexico	2.5%	✔ Integrated with global economy ✔ Cheap and qualified labour	✘ Political unrest ✘ Reliant on U.S. ties
🇧🇷 Brazil	2.4%	✔ Diversifying economy ✔ Strategic location	✘ High production costs ✘ Inflation
🇳🇬 Nigeria	2.3%	✔ High FDI ✔ Diversifying economy	✘ Political unrest ✘ Lack of infrastructure
🇷🇺 Russia	1.8%	✔ Natural resources ✔ Educated workforce	✘ Political unrest ✘ Lack of FDI
🇹🇷 Turkey	0.4%	✔ Cheap labour ✔ Strategic location	✘ Political unrest ✘ Red tape

Source: Global Finance Magazine

With these major emerging markets in mind, how can investors tap into the global wealth shift?

Where Are the Opportunities?

There are several avenues for an investor to play into this megatrend: structural solutions, consumer goods, and international investment.

Structural solutions

Emerging markets are increasingly gaining access to technology. Growth in connectivity is closely linked with improved productivity, and many countries are ripe for a surge in online users.

However, much can still be done to speed up technological adoption, such as boosting 3G/4G network volume and coverage, and lowering the cost of data and smartphones to be more economical.

By helping solve some of these structural constraints through technological innovation, investors can tap into the economic growth of emerging markets.

Consumer goods

As disposable income increases, a sizeable middle class will seek out products that elevate the quality of life. In India, domestic consumption is estimated to hit $6 trillion by 2023—four times its 2018 level.

The region’s spending will likely be propelled by higher-priced goods, as well as a wider variety of choices across food, transport, and fitness categories.

Global brands that plan to expand into emerging markets, or companies with a proven track record in these areas, are potential winners for investment.

International investment

Last but not least, investors can identify local winners in emerging wealth markets, through active or passive investing.

An active investment strategy would be to directly buy into individual company stocks, listed on a country’s stock exchange. Meanwhile, a passive investing strategy would be to seek out exchange-traded funds (ETFs) covering specific markets, and/or sectors within emerging markets. Many of these are also listed on major exchanges.

Diversifying either or both strategies across two or more countries can help mitigate risk. Investors can also choose index funds that broadly encompass all emerging markets.

As countries climb the economic ladder, the emerging wealth shift continues to gain momentum. By staying attuned to these macro changes, investors may unlock long-term growth from emerging markets.



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