E*Trade Says Its Future Is Bright. Analysts See Possible Deal.

The discount brokerage says it will be better off after Charles Schwab merges with TD Ameritrade. Others say its turn is coming.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Little more than a month ago, Gabriel Garcia left Pershing Advisor Solutions to become head of Business Management and Strategy for E*Trade Advisor Services. He was thrilled about the opportunity to “break the model of the custodial space” and help build a new platform for RIAs, he told RIA Intel.

Beginning with E*Trade’s acquisition of RIA custodian Trust Company of America (TCA) in 2017, the company has been working to create a more robust competitor. It shed the name of TCA but it kept the personnel and hired Garcia and others to build a formidable foe to Charles Schwab, TD Ameritrade, Fidelity, and others.

“There are some great incumbents in the space that have served the RIA community well but there are some gaps, frankly,” Garcia said Nov. 11.

But the brief list of RIA custodians got meaningfully shorter on Monday, when Charles Schwab confirmed reports that it was acquiring TD Ameritrade for $26 billion. Combined, the new company will have over $5 trillion in retail and advisory assets and service more than 14,500 RIAs. E*Trade Advisor Services has 225 RIAs and $19.4 billion in assets.

Razor-thin margins in the custody business mean scale matters and E*Trade doesn’t have much. Meanwhile, competitors have also eliminated trading commissions in their discount brokerage businesses; surrendering revenue in hopes the cost-saving will draw more investors and assets.

The pressures beg a question that has been continuously ringing in E*Trade’s ear: Is the company seeking a buyer?

“We believe E*Trade would be more likely to be put up for sale, unless management was willing to wait a couple of years for the Schwab-TD Ameritrade integration to be complete,” Chris Shutler, an equity researcher at William Blair, wrote in a note Nov. 21.

Pending antitrust approval, the integration of the companies will take 18 to 36 months, according to a statement about the deal from Schwab on Monday. If E*Trade can’t wait for that integration, other firms such as Fidelity, JPMorgan, Goldman Sachs, wirehouses (such as Morgan Stanley or Bank of America’s Merrill Lynch) or private equity firms could be suitors, according to Shutler.

However, “Other than Fidelity, which could squeeze out a ton of costs, the expense-related earnings accretion possibilities are likely lower for most of these other firms; this is why E*Trade is down today, in our opinion,” he wrote last week.

Investors might have viewed E*Trade as disadvantaged after Schwab’s acquisition of TD Ameritrade, but equity researchers at Deutsche Bank said last week they believed E*Trade could actually benefit from the RIAs who leave the new mega custodian.

They envision a scenario where E*Trade could take about 5% of TD Ameritrade’s customer base over several years but that would not preclude a sale.

“Even with an announced merger between SCHW & AMTD, we would not rule out potential merger possibilities with other firms across a wide spectrum of financial services including online brokerage, traditional brokerage, large or mid-size banks, or online consumer financial entities,” wrote Deutsche Bank Research Analyst Brian Bedell.

Schwab’s acquisition of TD Ameritrade and the new additional opportunity only “accelerates” E*Trade’s plans, Garcia told RIA Intel.

“As a client-focused firm that kind of speculation just isn’t our focus, and let’s be honest, rumors of E*Trade as an acquisition isn’t exactly a new story. To be sure, we are a scrappier player, but that’s always been central to who we are and the proposition of a new mega-behemoth doesn’t change that. Our position in the market gives us immense confidence that we’re not going anywhere—in fact we’re poised for growth.”

He also pointed to E*Trade’s stock plan administration and retail brokerage businesses, which are the most meaningful parts of the company today, in terms of revenue.

“Underpinning all of this is our brand—we have one of the best-known brands in the industry that punches way above its weight.”

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