In a move to act solely as an insurance provider, USAA sold to Charles Schwab Corp its wealth USAA (United Service Automobile Association) brokerage and USAA Managed Portfolios ® (UMP) accounts for $1.6 billion, $200 million short of the initially agreed price.
This announcement means that members with transitioned accounts will access their brokerage and managed portfolio accounts through Schwab.
This acquisition came after USAA sold its investment management company to Victory Capital Holdings for $850 million in November.
This deal increases the client accounts managed by Charles Schwab by 1 million and the Charles Schwab Corp’s worth of clients’ assets by over $100 billion.
USAA also signed a long-term referral agreement for Schwab to be its members’ exclusive wealth management and investment brokerage services.
Providing their expertise, other key players involved in this acquisition involved Credit Suisse Securities (USA) LLC, acting as the financial adviser to Charles Schwab with David Polk & Wardell LLP providing legal advice.
At the same time, Goldman Sachs served as financial adviser to USAA, with Simpson Thacher& Bartlett LLP as legal adviser.
A Look at the Charles Schwab Corporation
The Charles Schwab Corporation is a leading financial services provider in the United States with 32,400 employees.
Founded in 1971, with over 360 offices located chiefly in the United States and the United Kingdom, it boasts over 32.9 million active brokerage accounts, 2.2 million corporate retirement plan participants, and 1.6 million bank accounts.
Its total clients’ assets as of Nov 2021 went over $7.92 trillion.
The Charles Schwab Corporation provides a range of financial services through its subsidiary companies.
These services include wealth management, asset management, banking, financial advisory services etc. Charles Schwab subsidiary companies include Charles Schwab & Co. Inc., a securities broker-dealer with affiliates offering a complete range of investment services and products.
Their services include an extensive selection of mutual funds, financial planning and investment advice, retirement plan and equity, etc.
In addition, some of their other services include providing compensation plans, referrals to independent, fee-based investment advisors, and operational and trading support for independent, fee-based investment advisors through Mayer & Schweitzer, Inc.; Charles Schwab Investment Management, Inc., an investment advisor.
Its banking subsidiary, the Charles Schwab Bank (member FDIC and an Equal Housing Lender), is a banking and lending services provider.
Others include the Charles Schwab Trust Company, which provides custody services for independent investment managers, and Charles Schwab Europe (formerly known as ShareLink), a retail discount securities brokerage firm.
The USAA Asset Management Company
What started in 1922 when 25 military officers decided to insure their vehicles grew into USAA, a family of companies providing insurance, banking, investments, and retirement solutions to military personnel and their families.
The USAA is one of America’s only fully integrated financial services organizations.
Currently headquartered in San Antonio, with branches worldwide, the USAA gains recognition for its outstanding service, employee well-being, and financial strength.
The USAA website has more than 12.8 million members.
The USAA contains a subsidiary of companies in the property and life insurance, investment, and banking sectors.
Some of its subsidiary companies in insurance include the United Services Automobile Association, USAA Casualty Insurance Company, USAA General Indemnity Company, USAA Life Insurance Company, USAA Life Insurance Company of New York, USAA County Mutual Insurance Company, USAA Limited, USAA S. A, and USAA Insurance Agency.
The USAA Investment Services Company functions as the investment manager for its clients.
In addition, USAA Federal Savings Bank Member FDIC, USAA Savings Bank (USAA Credit Cards) Member FDIC, and USAA Residential Real Estate Services, Inc provide banking services to USAA clients.
Why Charles Schwab?
As announced in July 2019, this acquisition ushers at the beginning of a beneficial long-term relationship between both parties.
In an address made by Wayne Peacock, new President and CEO of USAA, to its clients, USAA stated its reason for going into the merger with Charles Schwab.
They believe that Schwab serves its client with an approach that views situations through its client lens.
Stuart Parker, the former CEO of USAA, also made a statement inferring an enhancement in their ensuring members’ financial futures with a client-first approach that gives clients additional access to more choices in investment products.
USAA Sold to Charles Schwab: The Acquisition Journey
USAA’s move to focus on providing primarily insurance services to its clients started when the global Investment Management firm: Victory Capital acquired USAA’s mutual fund and exchange-traded fund businesses on July 1.
USAA previously stated that Victory Capital and its operational business providers hired 230 USAA employees, and others affected within other divisions at USAA. In addition, about 60 were laid off or separated from the company.
This acquisition started in 2019, when Schwab made its claim to diversify revenues and started the purchase of the assets of USAA’s Investment Management Company, including its brokerage and managed portfolio accounts.
In a statement made by Walt Bettinger, president, and CEO of Schwab, Schwab expressed its admiration for the USAA mission to enhance the financial security of the country’s military servicemen and women and their families.
Walt Bettinger also assured the general public of its commitment to integrity and service for its clients and how the acquisition will benefit both companies and their clients.
Why Did USAA Sell?
Although USAA is a major player in the insurance sector, they could not compete with other key players in the investment sector when it came to the investment business. Scaling and client losses were also why USAA sold to Charles Schwab.
In terms of scale, USAA, with its over 13 million members, had 1.5 million of them investing billions of dollars, a mere 11.5%.
This amount was small compared to large asset management companies like BlackRock, Schwab, and Fidelity, who managed trillions of dollars for tens of millions of customers.
This problem meant that USAA’s investment managers were competing with companies operating at least 10x their clients and a thousand times more money.
As a result, USAA spent more cash dealing with fewer clients at the same fixed expense the other larger companies paid. This issue meant USAA spent more of its clients’ money servicing the fixed cost levied on assets management companies.
As an example, with tens of millions of customers, BlackRock may pay its service fee by making a few dollars deductions, which is negligible primarily due to its large customer base.
By comparison, USAA made more significant deductions on clients’ money to service its fixed expense due to its smaller clients.
For example, a $1 million fixed expense fee levied on USAA million customers translates to a $1 per client. This amount seems small, but it amounts and eats up into clients capital with time.
In contrast, the same million dollars levied on 80 million clients amounts to $0.0125 per client for more prominent asset management companies. This practice meant that USAA spent 80 times more servicing their client investment needs.
Another reason was the unsustainable nature of the USAA investment management company. USAA had to compete with other key players in the investment sector regarding size and spending.
Although USAA could decide to spend more to boost and grow its clients’ base, they could never outspend big-league runners’ investment.
Finally, due to the more significant deductions made on its clients’ money to service their expenses, USAA lost a considerable portion of its investment capital.
As a result, it was struggling on its feet and needed to merge with a more substantial wealth management firm to leverage those losses. So when USAA sold to Schwab its investment division, Schwab absorbed those losses.
In addition, with Schwab’s massive scale, Schwab could reduce client losses and compete with other large investment groups at a lower price.
How About the USAA Employees?
For every employee whose company is amid a merger and acquisition comes the fear of losing their jobs. This fear was a primary concern for USAA employees during the acquisition process.
Stuart Parker, the CEO of USAA, to answer the question concerning USAA employees’ status and how the acquisition will affect them, reiterated USAA’s commitment to making the transition process seamless for members and providing opportunities for employees.
With the transaction closing and USAA sold to Schwab, nearly 400 USAA investment employees have transitioned to Schwab.
Many of those employees will continue to support USAA members with Schwab’s investment and wealth management needs.
USAA Sold to Charles Schwab: What Do Their Clients Think?
Some USAA clients had concerns regarding the volatility and ownership of shares, mutual funds, and other managed assets when USAA sold to Schwab.
Questions on the new handler of the customer portfolio or if there will be a transfer of ownership with the new management were among the most popular ones.
To handle this, the Charles Schwab Corporation has granted USAA members accounts that transferred to Schwab access to a portal on Schwab.com to guide them through the features and services available with their Schwab account.
This hub also contains helpful FAQs, to-do lists, and Schwab contact information.
USAA clients with shares in any USAA mutual funds or ETFs still maintain ownership of those shares.
This ownership also extends to clients with investment accounts LIKE 529s, IRAs, and taxable brokerage accounts in USAA.
Also, clients with USAA brokerage accounts or USAA portfolio managed service will now have their accounts handled by Schwab.
In addition, all funds retained their USAA brand name when USAA sold to Schwab. The recent acquisitions by Victory Capital and Charles Schwab mainly provide tools that reduce clients’ expenses.
Also, asides from the wealth of expertise the Charles Schwab Corporation now provide to former USAA clients, there are some additional benefits to be reaped by members.
Members have 24/7/325 access to experienced Schwab representatives. Also, the massive scale gained when USAA sold to Schwab allows for a reduced cost in handling members’ investments.
Charles Schwab will also bring a modern approach to its new clients, making investing more manageable and more accessible. Their range of products and services also helps clients meet their investment needs.
USAA Sold to Charles Schwab: What’s in It for Schwab?
Schwab led several acquisitions this year, some of which include TD Ameritrade Holding and USAA, and in the past two months, it has closed three out of four outstanding deals.
Prominent minds in the investment sector all agree with this acquisition, most of which decided it was beneficial to both parties.
While USAA is getting a steady revenue stream from Schwab for referring their clients to them, and Charles Schwab Corporation has undoubtedly increased its accounts and total client assets, what else does the Charles Schwab Corporation stand to gain?
Firstly, since USAA sold to Schwab, reports have gone on to indicate that Schwab has gained over 6,000 new accounts in five weeks through USAA referrals.
These referrals play a huge role in organic growth; organic growth is the most challenging and most valued method of building and scaling client relationships in investment management.
After all, a new client could mean a $10,000 jump in revenue. Over 6,000 new accounts can translate to over a $90 million increase in revenue—all in just a couple of weeks.
Furthermore, out of 1 million accounts gained by Schwab, only 10% of USAA members use wealth-management services, creating plenty of opportunities for Schwab to sell more services and products.
This acquisition also improves scaling for Schwab, which helps them deliver a strong value proposition to clients.
What’s Next for Both Parties?
This change supports USAA’s efforts to simplify its business and focus on core products and services in insurance and banking.
In addition, USAA continues to expand on its award-winning service and product offerings.
USAA will continue to provide service and highly competitive products across banking, property and casualty insurance, life and health insurance, and annuities.
Currently, USAA is getting in a steady revenue stream by referring its clients to Schwab while maintaining its sole focus on providing quality insurance to military members.
In addition, Schwab is winning over 200 new accounts every business day. So both organizations seem to have it good thus far.