Brokerage Consolidation: Robinhood’s Next Acquisition?
We have seen some consolidation in the brokerage industry over the past year or so, particularly with Charles Schwab (NYSE: SCHW) the purchase of TD Ameritrade and Morgan stanley (NYSE: MS) buy E * Trade. However, with commission-free trading now the industry standard and the general downward trend in fees for financial services, consolidation may not be complete yet. In this short video, Motley Fool analyst Jason Moser and Fool.com financial industry expert Matt Frankel, CFP discuss whether Robinhood could be the next acquisition target, and who might be interested.
Jason Moser: What do you think – you know, we saw the news last week, and talking about big banks, and one that we really don’t talk about much, but I think some news that was at least noteworthy here, Morgan Stanley acquires Eaton Vance (NYSE: EV). And we talk a lot about consolidation in the space, I mean, it’s definitely an effort by Morgan Stanley to boost that investment wing of the business. Eaton Vance has some $ 500 billion in assets under management. I mean, from Morgan Stanley’s point of view, not the biggest business in the world, you know, Morgan Stanley is a considerably bigger company. But it’s not a small, targeted acquisition either, any ideas in there?
Matt Frankel: Well, not to brag or anything, but a few weeks ago when you said what trends you were watching in the rest of 2020 in banking, I said consolidation in the brokerage space.
Moser: Well, then brag a little bit, by all means, Matt. That’s one of the reasons we’re here, isn’t it, talk about your own book. [laughs]
Frankel: Well, I didn’t mention Eaton Vance. I mean, this was the one I really didn’t think was going to be redeemed. I thought someone would need, like, a Robinhood or something to get more technical, I guess you would say, and appeal to the millennial crowd. And remember, Morgan Stanley just acquired E * Trade, as it just happened. So, they really put a lot of effort into growing their business.
And from that point of view, when you combine their existing customer base, which at first glance I don’t know how many assets Morgan Stanley already had, but I have to say it’s over $ 1 trillion. And then combine that with all of E * Trade’s retail brokerage assets and Eaton Vance’s $ 500 billion in wealth management assets, suddenly you’ve got a much more scalable and potentially profitable business. So I said a few episodes ago like, I mentioned that consolidation was something to watch out for and the reason is you know the fees are going down, the way you are going to make money. money goes through scale and efficiency, among other things – I mean brokers have other ways of making money. But I mean, even though TD Ameritrade’s commissions went down to 0%, that didn’t mean they went bankrupt, then. But it’s going to be a long tail trend, I think, in space. I still think someone is going to step in and acquire Robinhood.
Moser: Yeah, I think I would probably put some money on that too at some point. I mean, there were a couple of things. As far as you are concerned, this acquisition, Morgan Stanley is going to oversee nearly $ 4.5 trillion in client assets across all of its wealth management divisions, which is fair, obviously an incredible number.
I think it’s interesting too, it will give them a little more presence on ESG [Environmental, Social, and Corporate Governance] space, right? That’s obviously a direction a lot of these companies are heading in, a greater focus on ESG investing, and rightly so. I think this will be something that will become more and more important over time for investors. But then there was a revealing quote from Morgan Stanley, CEO, James Gorman. He said in an interview “It was kind of obvious, if we hadn’t done it, someone else would have.” And it really says, I think, it’s all there. They had been thinking about it for a while and really realized that this deal had to happen.
Frankel: Yeah, I mean, it was kind of the same, in my mind, the same reason that Schwab acquired Ameritrade. Just because, like you said, if they didn’t, someone else would. It’s a powerful franchise. According to many listings, they were one of the top rated brokers in terms of features and things like that. So when the commissions have gone down to 0%, it’s only a matter of time before there is, sort of like, land grabbing for all the small businesses, including those that didn’t. already no commission, like Robinhood. I can see a business like Square (NYSE: SQ) buy them.
Moser: Yes. And we’ve talked about it before, that’s for sure.
Frankel: Or even Pay Pal (NASDAQ: PYPL), they may be brokerage in their Venmo app.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.