WealthManagement Magazine

Schwab Buys ETF Firm

In an effort to ramp up its ETF offerings, Charles Schwab announced today that it has acquired an ETF-focused money management company with nearly $4 billion in assets. Schwab paid $150 million in cash and stock for the company.

In an effort to ramp up its ETF offerings, Charles Schwab announced today that it has acquired an ETF-focused money management company with nearly $4 billion in assets. Schwab paid $150 million in cash and stock for the company.

“The price is high based on typical price-to-AUM multiples,” says Dan Inveen, principal and director of research for FA Insight. “But Windward appears to be commanding a premium based on its history of rapid growth and solid portfolio performance.” Windward has seen compound annual growth in client assets of 56 percent per year over the five years ending July 31, 2010, through a combination of strong organic growth and strong investment performance.

What does the deal mean for the firm’s RIAs and retail investors? Investment advisors are one of Windward’s fastest growing client segments, and when the deal closes in the fourth quarter, Schwab will waive commission costs for Windward managed accounts custodied on the Schwab Advisor Services platform. Further, Schwab says Windward’s money management solutions will be available at a lower cost to the clients of Schwab RIAs. That’s important since nearly one third of Windward’s assets already come from its relationship with Schwab, which also serves as the custodian for about two-thirds of the money manager’s assets.

The purchase of Windward Investment Management is in line with Schwab’s strategy of growing its ETF business. Dan Inveen, principal and director of research for FA Insight says, the Boston-based firm will allow Schwab to “expand upon its growing platform of ETF and managed account offerings, two of the fastest-growing investment product areas.”

Schwab has been working to grow this part of its business for some time now, says one New York-based analyst who covers the firm but preferred to speak anonymously. It rolled out the first of its ETFs in November 2009 and now offers eleven proprietary ETFs—three of which were launched this month. “For the Charles Schwab Corporation as a whole, this deal is relatively small,” he says. “But for its ETF business, which holds about $1.5 billion in assets, it’s very meaningful. They’re adding $4 billion in assets in one shot, he adds.”

Clearly, Schwab is betting on continued growth in the ETF market. And it has good reason to do so. Financial Research Corporation estimates that ETFs will experience compound annual growth of 23.4 percent between 2010 and 2014. And Schwab reported a 38 percent increase in ETF usage among clients from June 2009 to June 2010. Bernie Clark, executive vice president for Charles Schwab Advisor Services, says this deal is significant because Schwab is actually acquiring a money management capability rather than entering a relationship like it did in April with J.P. Morgan.

That agreement gave Schwab clients access to J.P. Morgan’s fixed income securities including new-issue and secondary municipal bonds, corporate debt securities and non-convertible preferred securities. In March, Schwab entered a similar agreement with PIMCO to offer municipal bond ladder separately managed account strategies.

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