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Schwab in Talks to Buy USAA Wealth, Brokerage Units, WSJ Reports

The San Francisco-based brokerage firm is in talks to buy USAA’s brokerage and wealth-management operations for roughly $2 billion.

By John Gittelsohn and Devon Pendleton

(Bloomberg) -- Charles Schwab Corp. appears to be making a play to grab more advisory clients as fees fall for asset management and trading.

The San Francisco-based brokerage firm is in talks to buy USAA’s brokerage and wealth-management operations for roughly $2 billion, the Wall Street Journal reported Monday. The deal may be reached this month, the newspaper said, citing people familiar with the matter.

The potential transaction underscores the increasing race by asset managers to diversify amid competition to lower fees for trading and fund management. In March, Schwab introduced the first monthly subscription plan for clients. Vanguard Group Inc., the low-fee fund leader, is devoting more resources to offering advice and Fidelity Investments last year started offering zero-fee index funds.

Baby boomers are becoming increasingly dependent on money managers as they retire at a pace of 10,000 a day.

Traditionally viewed as an adviser and broker to the masses, Schwab’s USAA deal would fuel expansion in an arena that’s seen as having better growth prospects and a higher return on equity than most other retail banking businesses.

It would also broaden Schwab’s exposure to a demographic that’s booming in the U.S. In North America, personal financial wealth grew by nearly a quarter in the three years ending in 2018 to $90.3 trillion, according to a Boston Consulting Group report.

Representatives for Schwab and USAA declined to comment when reached by Bloomberg.

Schwab has been trying to increase the share of revenue and income from adviser services. Adviser services made up 27.7% of revenue and 30.4% of operating income for fiscal 2018, according to data compiled by Bloomberg. The majority of Schwab’s revenue last year came from net interest margin, or earnings from client cash deposits, a source that would be threatened by falling interest rates.

The potential transaction got a lukewarm reception from investors and some analysts.

USAA would add about 3% to Schwab’s total of $3.6 trillion in client assets, so “clearly not qualify as a transformative deal although is not insignificant,” Wells Fargo & Co. analysts led by Christopher Harris said in a note Monday.

USAA offers insurance, banking and investment services, primarily to members of the military. The firm says it has 12.8 million members.

On July 12, Bank of America Corp. cut its Schwab rating to neutral from buy, citing a tougher revenue and margin outlook.

Schwab shares climbed 0.9% as of 2:40 p.m. in New York, paring earlier gains. The stock has declined 2.6% this year through July 12, while an S&P 500 index of asset managers and custody banks returned 12%.

The company reports earnings tomorrow and will hold a business update call July 19.

To contact the reporters on this story:
John Gittelsohn in Los Angeles at [email protected];
Devon Pendleton in New York at [email protected]

To contact the editors responsible for this story:
Alan Mirabella at [email protected];
Pierre Paulden at [email protected]
Josh Friedman

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