The Widening Moat Between Wealth Management’s ‘Oligopoly’ and Everyone Else

The moat between the biggest independent RIA custodians — Charles Schwab, Fidelity, TD Ameritrade, and BNY Mellon’s Pershing — and their smaller rivals is expected to widen, as the top firms leverage their scale and continue to invest in themselves, according to a new note by research analysts.

That number of top firms is likely to shrink further, too. Last week, the Department of Justice approved Charles Schwab’s acquisition of TD Ameritrade. Schwab agreed to buy the competitor for $26 billion in November and the deal is expected to close in the second half of this year.

Together, the two giant financial services companies will make Schwab enormous in comparison to most others, with over $5 trillion in customer assets and over 30,000 employees (TD Ameritrade has about 10,000 employees). Assuming the deal is approved, Schwab will also serve as a custodian to roughly 15,000 independent RIAs, which employ thousands of financial professionals.

In a note Monday, JMP Securities analysts said they agreed with the DOL’s conclusion because “the optically high market share that faced some scrutiny does not tell the entire story.” Schwab, TD Ameritrade, Fidelity, and Pershing account for well over 50% of the $5 trillion RIA custody market. But compared to the entire wealth management industry, including bank-owned and independent broker-dealers, such as Bank of America’s Merrill or Raymond James, those four aforementioned firms only account for about 10% of the advisor market, “a less controversial number,” to JMP Securities.

Meanwhile, the RIA channel of financial services is expected to continue to grow organically, and advisors from other channels will keep trickling into it. That means more opportunity for the “oligopoly,” Devin Ryan, a managing director and analyst at JMP Securities, told RIA Intel.

“Against that backdrop, we believe the top custodians are currently poised to consolidate additional [market] share as they continue to widen their moat from most competitors that do not have the resources to keep up with their technology investments, service, and even typically more attractive economic model for advisors and clients,” Monday’s JMP Securities note said.

In games of scale, success begets success. The barriers for new entrants will get higher as bigger companies of scale gain market share.

But the situation is far from hopeless for competitors. JMP Securities also believes there could be room for other scale players. For example, Schwab’s platform “will not be for everyone.” 

“It is rare that a financial combination doesn’t initially include some account breakage, and in this case, some financial advisors that utilize both Schwab and Ameritrade for the sake of diversification could look for an alternative, while the combination might also open the door for advisors to be willing to listen to other options that exist,” Monday’s note said.

If the deal between them closes as planned, TD Ameritrade will become a wholly-owned subsidiary of Schwab and the integration of the two companies is expected to last 18 to 36 months, giving advisors significant time to consider other custodians. 

A lot could happen between now and then. 

Goldman Sachs said last month it was delaying the launch of its digital wealth management offering, or robo advisor. But it has been building and acquiring companies to bolster the bank’s wealth unit and those pieces are starting to coalesce. The investment bank also agreed in May to acquire Folio Financial, a self-clearing broker-dealer and technology company, and the seller told one client that Goldman was “very interested in and committed to RIA custody.”

JMP Securities sees Goldman Sachs as one potential new competitor in the RIA custody market. “Based on where we see the firm evolving, we think the potential exists for a very strong custodial offering.”

Monday’s note also mentioned Interactive Brokers, the only RIA custodian that currently supports TradingFront, a relatively inexpensive platform meant to replace most or all of the a la carte software services used by many independent RIAs. TradingFront includes a client relationship management, or CRM, system and portfolio management software. “We’re certainly not doing anything new, we’re putting the pieces together in a better way,” TradingFront founder Yang Xu told RIA Intel in May.

This spring, Altruist, a new digital, commission-free custodian for RIAs, ended its beta phase and began onboarding firms. Like TradingFront, it provides much of the software to RIAs that they would normally have to pay for, saving them thousands of dollars each year.

Still, Pershing is “absolutely laser focused on growth” and the short list of other mega RIA custodians are in a position to meaningfully improve.

“It’s not getting easier. Schwab is only moving the goal post out further,” Ryan said.