Merger & Acquisitions, Competition Theory, Technology, Legislation & Regulation, Antitrust Litigation & Investigations

Consolidation of Financial Markets Continues as Morgan Stanley Offers to Buy E*TRADE, Pioneer of Low-Cost Online Trading Segment

Deal part of a consolidation trend.

Morgan Stanley’s proposed $13 billion all-stock acquisition of the popular E*TRADE online discount brokerage made big headlines last week. While no major antitrust problems are immediately apparent, the deal is part of a trend of consolidation in the financial services industry triggered by disruptions to profits like zero commission trading. The deal now heads for shareholder and regulatory review.

According to the New York Times, this is the biggest acquisition in the financial sector since the 2008 meltdown, and signals Morgan Stanley’s continued attention to asset wealth management over the more volatile investment banking and trading spaces. Or, as CEO James P. Gorman put it, “the decade-long transition of our firm to a more balance-sheet-light business mix, emphasizing more durable sources of revenue.”

This deal relies on growing success in the so-called “mass affluent segment” – the lower rung of the wealthy, people with between $250,000 and $1 million in assets – which comprises more than 20 million households, according to the Times. Between 12% and 15% of Americans use an online investing/stock trading service each year, figures compiled by Statista show. Morgan Stanley hopes that as members of this segment continue to accrue assets, it will be able to transition them to services Morgan Stanley offers to higher net-worth individuals. Morgan Stanley’s trading revenue in 2009 was $7.72 billion. In 2018 it was $11.55 billion.

According to statements from the two companies, E*TRADE has more than 5.2 million client accounts with more than $360 billion in retail client assets, and Morgan Stanley has 3 million clients and $2.7 trillion in client assets. The combined company will have $3.1 trillion in client assets, 8.2 million retail client relationships and accounts, and 4.6 million stock-plan participants. Morgan Stanley said the deal will increase the company’s wealth management scale, fill product and service gaps, and enhance digital capabilities. Morgan Stanley hopes to become a “top player across all three channels: Financial Advisory, Workplace, and Self-Directed.” As with any good acquisition, the company predicts “significant cost and funding synergies” and “stronger financial performance and shareholder value creation,” buzzwords that delight investors.

A wildly successful disrupter, E*TRADE credits itself with creating the online brokerage category and continues to innovate today. Mike Pizzi, Chief Executive Officer of E*TRADE, said the deal will enable it to deliver “an even more comprehensive suite of wealth management capabilities” and serve a wider spectrum of customers.

Competitors in this space include: TD Ameritrade, Ally Invest, Charles Schwab, Fidelity Investments Inc., Interactive Brokers LLC, Vanguard Brokerage Services, Robinhood Financial, Merrill Edge, T. Rowe Price Group Inc., and Betterment.

Announcement Follows Another Wealth Management Mega-Merger

The E-Trade/Morgan Stanley merger comes on the heels of another wealth management mega-merger: Charles Schwab’s proposed acquisition of TD Ameritrade for $26 billion in stock. As discussed previously, the Charles Schwab/TD Ameritrade merger raises significant antitrust issues and should receive significant attention from the Antitrust Division of the U.S. Department of Justice. But this is primarily due to both companies’ large market shares in the RIA custodian market, which is not an issue for this deal.

However, while Morgan Stanley’s purchase of E-Trade appears less problematic from a competition standpoint than Charles Schwab’s acquisition of TD Ameritrade, it continues an unsettling trend of consolidation in parts of the financial services industry that mostly affect non-institutional customers. As margins continue to decrease with the implementation of pro-consumer policies (e.g. zero commission fees), large firms are attempting to protect profits by acquiring investor-customers and revenue generating assets (e.g., retail bank deposits) from smaller rivals. This is a major reason behind Charles Schwab’s acquisition of TD Ameritrade, and why some industry analysts have been predicting an E*TRADE acquisition since last fall. And this trend is likely to continue for as long as disruptors like Robinhood continue to offer lower prices and preferred services or reach younger audiences through millennial-friendly technology.

Given this reality, federal regulators should act with heightened awareness of creeping consolidation in the wealth management industry. Regulators should also not hesitate to block or implement conditions on mergers, preferably structural remedies, to ensure healthy, pro-consumer competition is preserved in this market.

Edited by Tom Hagy for MoginRubin LLP.

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