InvestmentNews Editorials

To survive in the land of the giants, RIAs must be vigilant

Human interaction in the dispensing of financial advice is bound to remain a constant

Nov 30, 2019 @ 6:00 am

By InvestmentNews

The announcement of Charles Schwab Corp.'s $26 billion acquisition of TD Ameritrade Holding Corp. has sparked a flurry of questions in the registered investment adviser community. Are other custodial mergers coming? Is the survival of smaller custodians threatened? Will a significant number of RIAs leave Schwab for a smaller custodian without a huge retail business of its own? Will Schwab embrace the smaller RIAs at TD Ameritrade that it once may have turned away? Will TD Ameritrade clients have to repaper? What will happen to TD Ameritrade's much-liked technology? Can Schwab pull off a giant merger with minimal operational glitches? How long will lunch lines stretch at IMPACT 2020 if all TD Ameritrade's approximately 5,000 RIAs and Schwab's 7,000-plus RIAs decide to attend?

[More: TD and Schwab tell advisers it's business as usual, for now]

The big-picture question, of course, is whether 50% to 70% of the RIA industry's custody business being concentrated in one provider is good for individual RIA firms, their clients and the industry as a whole. The answers to all the acquisition's questions will be determined over time, but there is no uncertainty over what was behind the takeover: the quest for scale.

Custody of $5 trillion in assets will provide a post-acquisition Schwab with enormous economies of scale, theoretically making possible even greater investments in cost-reducing and service-enhancing technologies. It will also enable Schwab to compete more effectively against other giants in the financial advice arena.

Those giants are already engaged in battle, even without the entry of Alphabet, Amazon and other tech behemoths that are perennially reported to be considering bold and disruptive entries into financial services. As coverage of our Future of Financial Advice Conference notes, big players in the financial services industry are poised for a turf war over the mass affluent, which accounts for more than 70% of U.S. households. Major traditional brokerage firms, robo-advisers, private banks and asset managers are all marching into each other's territories to claim market share, offering advice in formats that range from completely automated to completely human with countless combinations along the spectrum.

[More:Charles Schwab to launch TDF-managed account hybrid for 401(k)s]

One such giant, which previously ignored those standing below the top rungs of the wealth ladder, is Goldman Sachs. As reporter Ryan W. Neal noted last week in his cover story, Goldman plans to generate $5 billion a year in additional revenue by the end of 2020 by offering new digital banking products, consumer lending and financial advice to the mass affluent. Prodded into commercial banking by the government during the financial crisis, the former white shoe investment bank now can offer a full range of financial services, upmarket and down. Its Marcus digital bank provides personal loans and high-yield savings accounts; its Clarity Money is a mobile personal finance app; and Honest Dollar is its automated IRA platform. For advisers who think those services are just icing, Goldman also owns a slice of advisory cake — United Capital, with its FinLife Partners technology tools for client engagement that are licensed to independent RIAs.

[Recommended video:Ed Slott: Make sure your small business clients consider this before they convert IRAs to Roths]

As Goldman Sachs and other giants engage more fully in the advisory space, refining their offerings through experience and customer feedback; and as technology continues to drive innovation and the push for scale, a la Schwab-TD Ameritrade, there is no doubt that giants will encroach on smaller businesses providing adviser-to-client personal advice delivery. Concurrently, however, technology solutions similar to those the giants are offering are becoming available from tech providers — and sometimes from the giants themselves — that permit individual advisers to compete on an equal footing.

While adviser business models may change as consolidation and other scale-building developments unfold, the need and demand for some measure of one-on-one human interaction in the dispensing of financial advice is bound to remain a constant. Advisers should remain vigilant, guard their flank and continue to make sure they are providing their clients with the most up-to-date services they can.

Register nowfor our ESG & Impact Forum at the U.N. on Dec. 5.


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