This Vanguard Chart Is Why Schwab Bought TD Ameritrade

The big news while I was on vacation was that Schwab bought TD Ameritrade for $26 billion in an all-stock transaction (press release). Well, first Schwab shaved off 17% of TD Ameritrade’s value by cutting their trade commissions to zero, and then they bought AMTD at a multi-billion dollar discount to what it would have cost just a month earlier. Nice move.

Now that trade costs have gone to zero, and index fund expense ratios are also pretty much zero, what’s left? Vanguard funds now have a greater market share of all funds and ETFs than that of its next three biggest competitors combined, per this Marketwatch article:

That doesn’t include Schwab funds, which aren’t even on the chart.

Vanguard dominates because it has a long record of passing on virtually all of the benefits of scale to their clients. As they gathered more assets, they lowered their expense ratios, which helped them to better returns, which helped them gather more assets, and so on. Index funds may be a commodity now, but more people buy them from Vanguard than any else by far.

Vanguard is now moving into the portfolio advising turf formerly dominated by Schwab, Fidelity, and TD Ameritrade. The only way Schwab and TD Ameritrade can compete is through scale and creating a better total package for both advisors and retail customers. Can customer service and technology make enough difference that people will hold their funds and ETFs at Schwab?

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