Schwab-TD Ameritrade Merger Challenged in Antitrust Lawsuit

In November 2019, the Charles Schwab Corporation and TD Ameritrade Holding Corporation announced their entrance into a definitive agreement for Schwab to acquire TD Ameritrade in an all-stock transaction.

At the time, Schwab President and CEO Walt Bettinger said the deal shouldn’t be a surprise to the industry, given the shared ethos of the two companies. Bettinger further noted that the combined entity “will be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys.”

Now that the firms are taking their first steps towards integration, it appears that the mega M&A transaction is not without its critics—and in fact at least one lawsuit has already been filed seeking to halt the combination of Schwab and TD Ameritrade. Court documents show BlackCrown Inc., an independent minority owned and operated Securities and Exchange Commission (SEC) registered wealth management firm, has filed a civil antitrust action to prevent Charles Schwab from acquiring TD Ameritrade “in its current proposition for all of TD Ameritrade’s assets.”

Filed in the U.S. District Court for the Southern District of New York, the lawsuit states that Schwab and TD Ameritrade both have their respective custodian businesses, called Schwab Advisor Services and TD Ameritrade Institutional, that today compete aggressively and vie to provide custodian services for the wealth management industry.

“This competition has bolstered the American wealth management industry that oversees approximately $23.7 trillion in assets and contributes billions of dollars a year to the financial services economy, directly helping custody assets for independent registered investment advisers (RIAs) and independent investment adviser representatives (IARs) so they may deliver retirement and financial planning services for American citizens seeking to retire and to manage their personal assets,” the complaint states. “If allowed to proceed, the proposed acquisition would negatively transform the wealth management industry and directly harm and disenfranchise BlackCrown whilst equally harm and disenfranchise a great majority of assets (all independent wealth management firms below $200 million in assets under management) and all minority owned business owners of RIAs and IARs, whereas the entirety of the independent wealth management market is legally defined as small to medium sized businesses.”

The complaint states that, most prominently and damaging to BlackCrown, the acquisition would eliminate competition within the custodian market for independent wealth management firms to deliver and administer regulatory required and innovative custodial services for the entire independent wealth management industry. BlackCrown’s leadership says this would disenfranchise a great segment of wealth management firms with assets under management less than $200 million, “thereby effectively establishing a caste system (rich to play model) for independent wealth management firms, wherefore directly harming BlackCrown and other firms similar to BlackCrown in providing financial planning and wealth management services within the entire wealth management industry.”

According to BlackCrown, TD Ameritrade’s custodian services and technology are the only competitive alternatives to Charles Schwab for independent wealth management firms with smaller assets under management.

“The forward-looking combination of Schwab Advisor Services and TD Ameritrade Institutional would result in removing of general technology innovation, and the absolute removal of competitive pressures by and between Schwab Advisor Services and TD Ameritrade Institutional to launch either technology innovations and/or service innovations that directly benefit and help independent wealth management firms operate efficiently and scale profitability at lower costs,” the complaint continues. “Such a proposed combination and removal or diminished technological innovation will directly damage BlackCrown and all independent wealth management firms with AUM below $200 million.”

The lawsuit states that Charles Schwab has already preemptively announced plans, as of December 2, 2019, to downgrade the bulk of its RIA clients to a 1-800 call center service model to adjust to the TD Ameritrade acquisition. The complaint suggests that Charles Schwab will now set the benchmark at $200 million in AUM for the call center, “as those RIAs and IARs holding assets below the benchmark will have an impersonal model of working with Charles Schwab’s Schwab Advisor Services.”

Another important factor pointed to in the complaint is that the entire relevant market for custodian products and services is highly concentrated already, with just four custodians holding custody of 80% of the AUM representing the entire independent wealth management industry. These are Charles Schwab (via Schwab Advisor Services), TD Ameritrade (via TD Ameritrade Institutional), Fidelity (via Fidelity Clearing and Custody Solutions) and Pershing.

Charles Schwab shared the following comment in regard to the litigation: “We believe the complaint is baseless and we’ll respond at the appropriate time.”

The full text of the amended antitrust complaint is available here.