Charles Schwab (SCHW) announced on Monday it will buy rival TD Ameritrade (AMTD) in a deal valued at roughly $26 billion. The all-stock agreement, set to close in the second half of 2020, will create a brokerage behemoth with over $5 trillion in combined assets.
The deal comes after Schwab ended commissions for stock trades last month, spurring rivals like TD Ameritrade to do the same.
“I think that [the deal] was executed actually brilliantly by Schwab,” Pence Capital Management Chief Investment Officer Dryden Pence told Yahoo Finance. “They basically found the vulnerability that TD had was that the big piece of revenue were commissions. They were able to drive those down, that pushed the price down, and they were able to kind of force it into a bargain.”
Shares for both companies popped on the news, but Pence warns that $0 brokerage fees will present investment advisors, and the industry, with “other” challenges.
“What I fear in this is that people get really tied up over the free trade issue. You know, a free trade is very expensive if it's the wrong one,” Pence said. “If we're in an environment where everybody is incentivized to trade a whole lot, this hyper activity actually becomes more of a game than investing and I'm not sure people want to be doing that with their retirement.”
Last month, Schwab announced it would eliminate commissions on online trades of U.S. stocks and exchange-traded funds, leading major brokerages like E*Trade Financial Corp. (ETFC) and TD Ameritrade Holding Corp to make the switch, as well.
“I think people have to decide whether doing this as an investment or recreation, and I think that before, people didn't trade quite as much because of the incremental costs,” Pence said. “Now when you make that free, I think you may incentivize a lot of people to make this more of a game than as serious as it really needs to be.”
The full impact of the deal on investors is still to be determined. While minimizing costs could have initial benefits, Pence argues that zero fees “shouldn’t be a free for all” and urges investors to remember their long-term goals, mainly retirement.
“People need advice,” Pence said. “I’m not sure that everybody needs to be out there, sometimes running with sharp objects, because they can get caught up in in trading speculation, or they can get caught up in the ‘deal of the day,’ and then very susceptible to headline activity.”
“I think that what we really need to do, is recognize that [zero-fee] takes some of the advice out of the market,” Pence said. “And I think that’s a risk for people as a whole.”
Sarah Smith is a Segment Producer/Booker at Yahoo Finance. Follow her on Twitter @sarahasmith