FYI: I wouldn’t invest in a combined Charles Schwab-TD Ameritrade.
To be sure, it makes a certain amount of sense that Charles Schwab SCHW, +0.35%, the largest discount brokerage firm in the U.S., would be interested in acquiring TD Ameritrade AMTD, -0.52%, the second-largest firm. The discount brokerage industry has become a very-low-margin business dependent on as wide a customer base as possible.
Yet those margins have been declining before our very eyes. With brokerage commissions now zero, and Schwab charging no fee to access its basic Robo-Advisor platform (known as Schwab Intelligent Portfolios), the firm has become heavily dependent on upselling clients to the premium version of this platform that charges $30 a month and provides access to a human being. It will need a huge base of customers to upsell enough of them to turn a significant profit.
It’s not clear that a firm even as large as a combined Schwab-TD Ameritrade will be able to do so. It will have to jump over not just one, but two, very high hurdles.
Of course, Schwab has another major contributor to its bottom line besides charging for its advice: Net interest revenue, which is the difference between the interest it earns on customer cash balances and what it pays. But note carefully that this line item is dependent on attracting clients to its advisory platform and then keeping them.