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Charles Schwab to Buy USAA Assets

Deal ensures Schwab is the exclusive referral wealth management provider to USAA members, but given smaller account sizes, "we don't see conflicts in this and the RIA channel," says a Schwab executive.

Charles Schwab has agreed to buy the brokerage and managed portfolio assets of USAA’s Investment Management Company, the firm announced, for $1.8 billion in cash.

Schwab and USAA will also enter an exclusive long-term referral agreement that would make Schwab the “exclusive wealth management and brokerage provider” for USAA members. USAA provides insurance, banking, investments and retirement accounts to more than 13 million current and former members of the U.S. military.

Schwab will add over 1 million new accounts and some $90 billion in client assets through the acquisition, the firm said, helping it “add scale” to its $1.9 trillion investor services business; Schwab holds some $3.5 trillion in client assets overall.  

Three-fourths of the USAA assets Schwab is acquiring are self-directed brokerage accounts, executives said on a call with analysts Friday morning, with the remaining 25% in USAA’s managed portfolios or in customized, advised accounts. 

Part of the cost savings touted by Schwab executives would come from reducing the need for a "third party" clearing broker/dealer and custodian; Fidelity’s National Financial Services has been the clearing broker/dealer for USAA’s managed portfolio service, according to its form ADV. Schwab will also cut expenses and increase revenue by moving some $700 billion in cash sitting in USAA money market accounts to sweep accounts on its brokerage platform; sweep accounts traditionally have minimum returns to investors compared with yields on money market accounts. Schwab also said it will continue to sell USAA annuities to its retail client base, as it has in the past. 

Schwab hopes to tap more USAA members for wealth management. “It’s the referral agreement sets this apart,” said Peter Crawford, Schwab’s chief financial officer. “It’s not the traditional list of names, but really integrating our wealth management offering into USAA’s ongoing business.”

Schwab recently introduced a subscription pricing model for financial planning for its retail-based investors, charging an initial $300 financial planning fee followed by a $30 monthly maintenance charge. Schwab executives recently said the initiative has attracted $1 billion in assets in the months following the launch. 

Only 10% of USAA’s 13 million members are in USAA's wealth management offerings, executives said. But given that half of USAA’s clients have $100,000, it’s not likely many of them will fall into Schwab's referral program for registered investment advisors.

“We don’t see conflicts in this and the RIA channel,” Crawford said. "The services we provide to this membership are no different than services we offer to existing clients. Except as some of these members may want an advisor, to the extent we can put them in the Schwab advisor network, that helps them.” 

The transaction will close in 2020, with the conversion of USAA’s brokerage services and managed portfolios to Schwab’s platform.

USAA earlier this month sold its $81.3 billion asset management business, mutual funds and ETFs, as well as its 529 college savings plan, to Victory Capital.

TAGS: Investment
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