Schwab in talks to buy USAA units

Bloomberg

Charles Schwab Corp appears to be making a play to grab more advisory clients as fees fall for asset management and trading.
The San Francisco-based brokerage firm is in talks to buy USAA’s brokerage and wealth-management operations for roughly $2 billion, the Wall Street Journal reported. The deal may be reached this month, the newspaper said, citing people familiar with the matter.
The potential transaction underscores the increasing race by asset managers to diversify amid competition to lower fees for trading and fund management. In March, Schwab introduced the first monthly subscription plan for clients. Vanguard Group, the low-fee fund leader, is devoting more resources to offering advice and Fidelity Investments last year started offering zero-fee index funds.
“We’ve seen Schwab in general moving more in the direction of providing wealth- management and financial planning advice, more than just the DIY-investor platform,” Donnie Ethier, director of wealth management at Boston-based consulting firm Cerulli Associates, said. USAA’s clientele represent current and former members of the military who “tend to have a very strong culture and client loyalty and retention.”
Traditionally viewed as an adviser and broker to the masses, Schwab’s USAA deal would fuel expansion in an arena that’s seen as having better growth prospects and a higher return on equity than most other retail banking businesses.
In North America, personal financial wealth grew by nearly a quarter in the three years ending in 2018 to $90.3 trillion, according to a Boston Consulting Group report. Baby boomers are becoming increasingly dependent on money managers as they retire at a pace of 10,000 a day.
The advisory business is undergoing a sea-change as financial technology, such as robo-advisers and index funds, are transforming client needs and expectations, according Ethier, who has no direct knowledge of the potential transaction. Representatives for Schwab and USAA declined to comment when reached by Bloomberg.
Schwab has been trying to increase the share of revenue and income from adviser services, which made up 27.7 percent of revenue and 30.4 percent of operating income for fiscal 2018, according to data compiled by Bloomberg.
The majority of Schwab’s revenue last year came from net interest margin, or earnings from client cash deposits, a source that would be threatened by falling interest rates.
The potential transaction got a lukewarm reception from investors and some analysts.