A piece of flabbergasting news caused widespread distress among many people on 26th May 2020. Two American corporations finally sealed the deal, which was announced by Business Journal and Wall Street Journal a year earlier. Several people were stunned to learn about the mind-boggling acquisition of USAA’s Investment Management Company by Charles Schwab Corporation. USAA – Schwab was on everyone’s mind that day.
Although the acquirement was announced almost a year ago in July 2019, a rambling about the merits of such purchase began in full swing after the deal was finalised. The following discusses the background of the two giants, the minutes of the deal, and the long-term effect on employees and members.
While the Fortune 500 Company began its journey as an insurance company, they have diversified aggressively over the last ten decades to become a billion-dollar corporation. In the beginning, 25 United States Army officers laid the foundation of the United States Army Automobile Association (USAAA) in 1922. It was a way for them to insure each other’s vehicles.
Two years later, its name was shortened to United States Automobile Association (USAA). The company prospered rapidly and managed to double its membership from 15,000 to 30,000 during the Great Depression. During the early 1940s, they renewed the automobile insurance of members who were not in the country to help ease the burden of World War II.
By the mid-1940s, they brought in automated machines for their office and, in that process, became technological leaders in the industry. During the 1950s and 1960s, they ventured across the oceans and opened offices in Germany and England. In addition, they installed IBM punch-card processing machines to automate business operations. They also added their 1 millionth member in 1969.
Over the next four decades, they opened several offices across the United States and digitized their operations to ensure a smooth-running business.
They began offering investment and brokerage management services as well as banking services. In 2009, a remarkable decision by the management made all current and former servicemen in the United States military and their families eligible for USAA membership.
In the same year, they moved along with technology and launched their USAA Mobile App. During the 2010s, the company continued to grow significantly and attained its milestone of 12 million members in 2017.
That year, their net worth was estimated to be USD 31 billion. As per the 2020 USAA Annual Report to Members released on 4th May 2021, the company’s net worth stands at USD 40 billion. The exact value of its net worth is not known after the USAA – Schwab deal took place.
The Charles Schwab Corporation is almost half the age of USAA. Charles Robert Schwab and his two partners began selling an investment newsletter in 1963 titled “Investment Indicator.” That firm became a subsidiary of Commander Industries Inc. in April 1971. By 1972, Charles Robert Schwab purchased all stock of the said business and renamed it to Charles Schwab & Co., Inc. in 1973.
In the short span of five decades, Charles Schwab Corporation became a prominent financial service provider in the nation. Over the years, the company has purchased businesses, such as Mayer & Schweitzer, The Hampton Company, U. S. Trust, SoundView Technology Group, OptionsXpress, ThomasPartners, Wasmer, Schroeder & Company among others.
As of April 2020, the corporation currently boasts over 12.9 million brokerage accounts, 1.4 million accounts, and over USD 3.8 trillion in client assets. With the success of the USAA – Schwab deal, those numbers are likely to increase significantly.
Why Did USAA Sell Its Investment Management Company to Charles Schwab Corporation?
Perchance, it is one of the most important questions regarding the acquisition. USAA members, stakeholders, industry observers, and the general population have been questioning USAA’s drastic move to divest its investment branch. Of course, a company of USAA’s stature could easily hold its footing.
After the USAA – Schwab acquisition, Schwab enlisted its Virtual Member Branch to provide wealth management services to USAA members who moved to Schwab. Danielle Munoz jumped ship from USAA to Schwab. She presently serves as the Vice President of the Virtual Member Branch.
As per Danielle’s explanation, USAA has always worked to build a trustworthy relationship with its members and acted in those people’s best interests. USAA observed the present market situation, its growing competitiveness, industry consolidation, and strict regulatory demands. They realized that they had to facilitate the financial security of their members by any means necessary.
As such, a strategic relationship with a reliable, established financial services provider would be an appropriate way to do so. Also, as per a note released to its members by USAA, they believe that Schwab serves its clients by making decisions from their client’s perspectives. That is similar to how USAA treats its members. Hence, USAA chose Charles Schwab Corporation.
When Was the Deal Announced?
The talks of the acquisition came into the limelight during the start of the 2019 financial year. At that time, Wall Street Journal reported that Schwab was looking to purchase USAA’s Investment Management Company for approximately USD 2 billion and add more advisory clients for its asset management and trading.
It would also allow Schwab to gain exposure to and capitalize on a booming demographic in the United States. After Schwab agreed to purchase it for a cash price of USD 1.8 billion on 26th July 2019, the USAA – Schwab deal was greenlit.
Details of the Acquisition
People have been wondering about the exact particulars of the nearly two billion dollar deal. Here are the highlights:
- Charles Schwab Corporation agreed to pay USD 1.8 billion in cash to USAA.
- Both companies entered an exclusive long-term referral agreement.
- Schwab will add USD 90 billion in client assets and more than 1 million new accounts.
- The acquisition would add about 3% to Charles Schwab Corporation’s USD 3.6 trillion in terms of client assets.
The Aftermath of USAA – Schwab Deal
Many USAA members have been confused regarding the deal. Why? It is because some of them are being transferred to Charles Schwab Corporation while the others are being handed over to Victory Capital.
- USAA’s Investment Management Company includes its brokerage and managed portfolio accounts. It was acquired by Charles Schwab Corporation.
- USAA’s Asset Management Company contains mutual funds, exchange-traded funds (EFTs), or its 529 college savings plan. It was already sold to Victory Capital for USD 81.3 billion.
Other than that, Charles Schwab Corporation slashed off USD 200 million of the purchasing prices. So why did the price go down from USD 1.8 billion to USD 1.6 billion? It is because the USAA – Schwab deal was expected to add USD 90 billion in client assets and more than 1 million new accounts to Charles Schwab Corporation’s portfolio. However, the actual numbers were 1.1 million new accounts and USD 81 billion in client assets.
Nonetheless, it was a win-win situation for both companies. But how are they benefitting?
- Schwab gained over 1.1 million new accounts at a purchase price of USD 1450 per account approximately. In contrast, its rival Morgan Stanley bought 5.2 million accounts from E-Trade for the purchase price of USD 2500 per account. So, it was a great bargain for Schwab.
- USAA members are handled specifically through Schwab’s Virtual Member Branch to allow the seamless transition.
- Schwab is getting more than 1000 referrals per week through its exclusive referral agreement with USAA.
- For two years, USAA will receive 15 basis points per annum for every referral they make to Schwab.
- It took USAA four decades to build 1.1 million accounts. But, at the rate of 1000-1200 referrals per week, Schwab is likely to add the same number of new accounts in 21 years approximately.
- Around 1.5 million of 13.5 million USAA members had investment accounts. That is only 10% of its members. So, Charles Schwab hopes to capitalize on that opportunity and, hopefully, will gain more investment accounts through referrals. However, it seems like an unlikely scenario given that only 50% of USAA’s clients have USD 100,000.
USAA – Schwab Deal’s Effects on Employees and Members of USAA
When the initial talks about the acquisition began, there were growing concerns about the job security of the existing USAA employees. It was expected to affect the livelihood of more than one thousand USAA employees.
During the difficult global situation, many employees could have been laid off from the sale of the Investment Management Company. Yet, Schwab chose to take a different route. They added around 400 USAA staff to their workforce. It means that these former USAA employees will be handling the investment accounts referred by USAA.
Other than that, USAA would consider hiring over 400 employees in its USAA Life Insurance Company. But, one of its spokesmen mentioned that they expected around 350 employees to leave the company for greener pastures.
In a previous deal that took place between Victory Capital and USAA, the former employed 230 USAA staff, and the latter relocated the others to its other divisions. However, they had to lay off 60 employees.
The employees were not the only concerned party in the USAA Schwab deal. The USAA members were also concerned about how their accounts would be handled, changes in costs and policies, etc. In terms of experience and business prowess regarding wealth management, Schwab obviously has the edge over USAA. So, USAA members who transitioned to Schwab are likely to gain several benefits. Some of these are:
- USAA members with accounts are handled through Schwab’s Virtual Member Branch, which also employs former USAA employees. Hence, it promotes a healthy, friendly environment for both clients and employees.
- Schwab has a new hub on its official website (schwab.com) to steer the USAA members with accounts in the correct direction. Through the new hub, USAA members with accounts can find details of the features and services that they can avail of through their Schwab account. In addition, they can also get access to to-do lists, Schwab contact information, and helpful FAQs.
- Charles Schwab offers 24/7 customer service and support to all of its clients. So, the USAA members with accounts will not have to deal with USAA’s strict business hours once they transition to Schwab.
- The Charles Schwab Mobile App allows users to monitor their portfolios in real-time. They are easily accessible from any smartphone at any moment. Plus, the app connects over 300 national branches, so the user can seek professional advice and assistance from whoever they want. As such, the users will be comfortable with their portfolio management. [Note: J. D. Power ranked it as the #1 mobile app for wealth management.]
- Thanks to the USAA Schwab deal, USAA members can avail three types of accounts at Charles Schwab – stocks, mutual funds, and bonds. And they will pay exactly $0 for any equity trade done online. So, they will not have to pay a standard rate of $6 to $10 per trade.
- Charles Schwab also offers two types of Individual Retirement Account (IRA) – Traditional IRA and Roth IRA – that USAA members can take advantage of easily.
Was the USAA – Schwab Deal Actually Worth It?
Many people have wondered if the deal actually made any sense, or was it some sort of power-play move by both companies. The short answer to the aforementioned question is yes. Yes, the deal is absolutely worth it.
Why? A San Antonio, Texas-based Fortune 500 Company sold a lucrative part of its business to a competitor from San Francisco, California [presently, Westlake, Texas] for a large sum of money. Yet, money was not the primary motivating factor.
USAA sold its Investment Management Company because it cared about its members. It wanted its members to receive the best possible service in the foreseeable future. Hence, they chose Charles Schwab because that is another company that cares about its client. It also ensures the USAA members’ financial security is enhanced.
Of course, the large number of accounts and client assets sweetens the pot. Both companies are growing and reaping benefits from the deal even after it was finalized. In addition, the USAA members and employees are not adversely affected by the deal. All in all, it immensely benefitted every party involved.