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Consolidation in the Brokerage Industry: Is Robinhood Next to be Acquired?

By Matthew Frankel, CFP® – Oct 29, 2020 at 7:07AM

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We've seen several major brokers get acquired over the past year. Is millennial-focused Robinhood next?

We're seen quite a bit of consolidation in the brokerage industry over the past year or so, most notably with Charles Schwab (SCHW -1.46%) purchasing TD Ameritrade and Morgan Stanley (MS 0.90%) buying E*Trade. However, with zero-commission trading now the industry standard and the general trend toward less fees for financial services, the consolidation might not be done just yet. In this short video, Motley Fool analyst Jason Moser and financial sector expert Matt Frankel, CFP, discuss whether Robinhood might be the next acquisition target, and who might be interested.

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Jason Moser: What do you think -- you know, we saw the news last week, and speaking of big banks, and one that we really don't talk about a whole heck of a lot, but I think some news that was at least noteworthy here, Morgan Stanley acquiring Eaton Vance (EV). And we talk a lot about consolidation in the space, I mean, this is certainly an effort from Morgan Stanley to boost that investment wing of the business. Eaton Vance holds somewhere in the neighborhood of $500 billion in assets under management. I mean, from the perspective of Morgan Stanley, not the biggest deal in the world, you know, Morgan Stanley is a considerably larger business. But it's not just some little bolt-on acquisition either, any thoughts there?

Matt Frankel: Well, not to brag or anything, but a couple of weeks ago, when you said what trends you are watching in the rest of 2020 in banking, I said consolidation in the brokerage space.

Moser: Well, then brag a little bit, by all means, Matt. That's one of the reasons why we're here, right, talk your own book. [laughs]

Frankel: Well, I didn't mention Eaton Vance. I mean, that was one I really didn't think was going to get bought out. I thought someone would require, like, a Robinhood or something like that to get more techy, I guess you'd say, and appeal to the millennial crowd. And remember, Morgan Stanley just acquired E*Trade, like that just happened. So, they're really making a big push to scale up their business.

And from that perspective, when you combine their existing clientele, which off top of my head, I don't know how much assets Morgan Stanley already had, but I got to say it's over $1 trillion. And then combine that with all the E*Trade retail brokerage assets, and the $0.5 trillion of Eaton Vance's wealth management assets, all of a sudden you have a much more scaled and potentially profitable business. So, I said that a couple of episodes ago, like, I mentioned that consolidation was something to watch and the reason is because, you know, fees are coming down, the way you're going to make your money is through scale and efficiency, among other -- I mean, brokers have other ways they make money. But I mean, even though TD Ameritrade's commissions went to 0% that didn't mean they were going broke, so. But this is going to be a longtail trend, I think, in the space. I still think somebody is going to step in and acquire Robinhood.

Moser: Yeah, I think I would probably put money on that as well at some point. I mean, there were a couple of things. To your point there, this acquisition, Morgan Stanley is going to oversee close to $4.5 trillion of client assets across all of its wealth management divisions, which is just, that's obviously an astounding number.

I think it's interesting too, this will give them a bit more of a presence on the ESG [Environmental, Social, and Corporate Governance] space, right? That's obviously a direction where a lot of these firms are headed, a bigger focus on ESG investing, and rightly so. I think that is going to be something that just becomes more important as time goes on for investors. But then there was a telling quote from Morgan Stanley, CEO, James Gorman. He said in an interview "It was sort of obvious, if we didn't do this, someone else would have." And that really, I think says it all right there. They've been thinking about this for a while and really kind of came to the collision that this deal had to happen.

Frankel: Yeah, I mean, it was kind of the same, in my mind, the same reason Schwab acquired Ameritrade. Just because, like you said, if they didn't do it, someone else would. It's a powerful franchise. They were one of the, according to many lists, the top-rated broker in terms of functionality and stuff like that. So, when commissions went to 0%, it's just a matter of time before there is, kind of, like land grab for all the smaller firms, including the ones that were already doing zero commission, like Robinhood. I can see a company like Square (SQ 0.52%) buying them out.

Moser: Yeah. And we've talked about that before for sure.

Frankel: Or even PayPal (PYPL 2.16%), maybe they do brokerage in their Venmo app.

Jason Moser owns shares of PayPal Holdings and Square. Matthew Frankel, CFP owns shares of Square and has the following options: short September 2022 $155 calls on Square. The Motley Fool owns shares of and recommends PayPal Holdings and Square. The Motley Fool recommends Charles Schwab and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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