It’s a Merger Monday on Wall Street. The $108 billion proposed combination between AT&T and Time Warner is stealing the headlines, but the most important deal of the day may be between two asset managers you probably know from their commercials: TD Ameritrade (AMTD) and Scottrade.
The companies announced Monday that TD Ameritrade would acquire Scottrade in a $4 billion deal. The key figure from the deal is $944 billion, which represents the combined assets under management held by the combined entity.
With nearly $1 trillion in assets under management, a combined TD Ameritrade-Scottrade will have the kind of scale needed to compete in an environment wherein investors demand ever-lower fees on their investments.
As we noted this weekend, lowering costs is the easiest way for individuals to improve their returns. According to Monday’s merger announcement, a combined TD Ameritrade-Scottrade entity, “expects to realize approximately $450 million in combined annual expense synergies, and more than $300 million in additional longer-term opportunities.”
What does $450 million in “synergies” and $300 million in “opportunities” mean? Think things like lowering fees on trades, expanding TD Ameritrade’s bank of commission-free ETFs, and so on.
$1 trillion is the “price of admission”
When you think about the pressure asset managers have faced on the fee front, no company comes to mind more often than Vanguard. The Valley Forge, Pa.-based firm has over $4 trillion in assets under management, and the so-called “Vanguard Effect” is a widely-cited idiom for the aggressive cutting of fees across the industry.
Vanguard’s S&P 500 index fund, for example, charges investors just a 0.05% management fee, or $50 for every $10,000 invested in the fund.
This weekend, Vanguard CEO Bill McNabb spoke with Bloomberg’s Barry Ritholtz on the “Masters in Business” podcast, and outlined how his firm and others have re-shaped the industry.
“I think what we’re seeing right now [in the investment industry], is there’s a secular change that’s gone on, and will continue to go on, in terms of cost being an important component of investing,” McNabb said.
And in now-prescient comments, McNabb added, “Obviously, that’s played out most purely with indexing firms doing better. But I think it’s going to lead to further consolidation in the industry.” (Emphasis added.)
And here we are.
Ritholtz also asked McNabb if $1 trillion in assets under management serves as something like the “price of admission” to be a major player in the investment space. In other words, do you need at least a thirteen-digit asset base to be a major player in today’s environment? It certainly doesn’t hurt.
“I think you can [lower fees] at lower levels than [$1 trillion in assets under management],” McNabb said. “But certainly when you’re at that kind of level you’re spreading your fixed costs across a large asset base. And I think Vanguard is the purest form of transparency, if you will, into economies of scale if you look at how our costs have come down over time.”
Of course, the business model of a firm like Vanguard and an online retail broker like Scottrade — or even a more full-service broker like TD Ameritrade — is not an apples to apples comparison.
But any investment firm — whether they target cost-conscious institutional investors or trading-focused retail investors — is subject to competition in an environment of ever-declining costs.
Myles Udland is a writer at Yahoo Finance.
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