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

Future of the CFO: From Number Cruncher to Value Driver

View the high resolution of this infographic by clicking here.

In today’s fast-paced business landscape, a company’s chief financial officer (CFO) is more integral to operations than ever. In fact, about 41% of CFOs spend the majority of their time on non-finance related activities, fueling data-driven decisions across the business.

The only problem? Leaders outside of finance still see CFOs contributing the most value in traditional finance areas, such as accounting and controlling.

Today’s infographic from Raconteur explores the expanding scope of CFO responsibilities, as well as the perception gap between CFOs and non-finance leaders when it comes to the former’s primary value-driving activities.

The CFO’s Expanding Role

Traditionally, the CFO was focused on financial reporting and issues such as compliance, accounts, and taxation. However, the scope of a CFO’s duties has increased dramatically in recent years. Thanks to technological advances, CFOs are now able to access massive amounts of data on their organization’s operational and financial performance.

“This puts the finance function at the heart or, arguably, the mind of the business from the outset, with many now being crowned as the ‘stewards’ of the long-term enterprise vision.”

—Robin Bryson, Interim CFO at Impero Software

Armed with data, CFOs can help predict headwinds, forecast performance, and make informed decisions across departments. In a global survey, McKinsey asked finance leaders about the breadth of their responsibilities. Of the CFOs who said they spend they a majority of their time on non-finance tasks, here’s where their attention is focused:

However, other business leaders remain in the dark about this broader role.

Differing Views

While the CFO’s job description has evolved considerably, outside perceptions of it have not. In a survey of both CFOs and non-finance leaders, there is a clear difference of opinion with regards to where financial leaders create the most value:

CFOs see their largest contributions in the areas of performance management and strategic leadership, while others still consider the CFO’s value to be derived primarily from traditional finance and cost/productivity management.

How can CFOs demonstrate their increased responsibility to leaders outside of the finance realm?

Closing the Gap

According to McKinsey, CFOs can demonstrate their expanded role in three main ways:

1. Actively head up transformations.

While CFOs are already playing a role in transformations, non-finance leaders are less likely to perceive them as making strategic contributions. CFOs also tend to initiate the most transformations in the finance function alone.

To change perceptions, CFOs can lead enterprise-wide transformations, and communicate their strategic value through activities like high-level goal setting.

2. Lead the charge towards digitization and automation.

Few organizations have initiated the shift in a substantial way, with only ⅓ of finance respondents saying their companies digitized or automated more than 25% of their work in the last year.

However, the payoff is well worth the effort. Among those that have undertaken this level of change, 70% reported modest to substantial returns on investment.

3. Develop talent and capabilities across the organization.

CFOs have begun increasing their value through talent-building, but there is still a significant amount of room for further growth.

For example, CFOs can build capabilities during transformations, teach financial topics to non-finance leaders, and develop top talent across the organization.

Through these various strategies, CFOs can foster collaboration and understanding between departments—and succeed in their broader roles.