Schwab in Talks to Buy USAA Wealth-Management, Brokerage Units -- 2nd Update

By Dana Cimilluca, Telis Demos and Justin Baer 

Charles Schwab Corp. is in talks to buy brokerage and wealth-management operations from USAA for roughly $2 billion, a move that would push the discount-brokerage pioneer further into the coveted business of financial advice.

The deal, which could bring Schwab roughly $100 billion of assets from closely held USAA, may be reached this month, people familiar with the matter said.

San Francisco-based Schwab, which already has north of $3.5 trillion in client assets, has been moving further into wealth management as it increasingly expands beyond its roots as a discount broker.

The wealth-management business has grown more crowded in recent years as financial firms gravitate toward the relatively stable fees paid for financial advice and the deeper relationships with clients and their families it facilitates. For some financial services, low rates, the digitization of Wall Street and changing investor tastes have driven fees toward zero.

"In this rate environment, it makes sense for Schwab to pivot in that direction," said Cathy Seifert, an analyst at CFRA Research.

Schwab's move would be the latest in a string of recent deals by big wealth advisers and banks to snap up smaller firms as they hunt for growth in more specialized niches as well as other benefits of scale. Goldman Sachs Group Inc., for example, earlier this year agreed to buy boutique wealth manager United Capital Financial Partners Inc. for $750 million.

A prolonged market selloff after years of gains would darken the industry's outlook, and some smaller players may be looking to get ahead of any such downturn by merging with larger peers.

"It is a scale game, and increasingly so," said JMP Securities analyst Devin Ryan. "That drives consolidation."

Schwab, which reports results Tuesday, has become a powerhouse in financial services with a market value of almost $55 billion.

It has benefited as investors become increasingly conscious of the fees they pay and individual brokers defect from Wall Street along with their clients' assets. Discount brokers including Schwab, TD Ameritrade Holding Corp. and E*Trade Financial Corp. have also gotten a boost from the long bull run in stocks following the financial crisis, which has swelled account balances and helped them draw in aging baby boomers and do-it-yourself investors.

But competition is intensifying. The sticker price to trade online has been rapidly moving closer to zero, especially since the rise of upstarts such as Robinhood Markets Inc., which are geared toward younger investors. Established online brokers such as Schwab have shifted their businesses to gathering and managing assets, diversifying away from trading.

In addition to financial advice, Schwab is also a major custodian for other advisory firms. It is likely the company would bring in-house any of the back-office work an acquired business had outsourced to other custodians, Mr. Ryan said. "So every dollar of assets becomes more profitable," he said.

Should there be a deal, it would transform San Antonio-based USAA, which provides an array of financial services to military customers, into more of a pure-play insurer.

USAA offers home, life and auto insurance as well as online banking and investment services to current and former military personnel and their families. It was founded in 1922 by a group of 25 Army officers to self-insure their vehicles and was originally known as the United States Army Automobile Association, according to USAA's website.

USAA is the envy of much of the insurance industry when it comes to customer rankings and retention rates, regularly receiving accolades from independent research firms. But persuading clients to hire their insurance company for investment advice hasn't been an easy sell, and it isn't surprising USAA concluded it was time to further narrow its focus, analysts said.

The company earlier this month closed a deal to sell its asset-management business, including its mutual fund and ETF operations and its 529 college-savings plan, to Victory Capital Holdings Inc. As of April 30, that USAA business had assets under management of $81.3 billion.

A transaction, should one be reached, would add to what is shaping up to be a strong year for financial-services mergers and acquisitions. So far this year, tie-ups among financial-services firms have come a fast clip, fueled by a robust U.S. economy, buoyant financial markets and a loosening of regulatory oversight. There has been $138.8 billion of financial M&A so far in 2019, compared with $117.9 billion at this time last year, according to Dealogic.

--Lisa Beilfuss contributed to this article.

Write to Dana Cimilluca at [e-mail], Telis Demos at [e-mail] and Justin Baer at [e-mail]

(END) Dow Jones Newswires

July 15, 2019 18:28 ET (22:28 GMT)

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