(Photo: Christopher Dilts/Bloomberg)

Charles Schwab is set to buy TD Ameritrade for $26 billion, which could create a firm with some $5 trillion in client assets, according to a report from Fox Business.

The move comes as the brokerage business has been racing to cut commissions to zero — which both firms moved to do last month. It also comes on the heels of Schwab's plan, announced in July, to spend $1.8 billion on USAA's brokerage and managed portfolio accounts, which have some $90 billion in client assets.

Schwab, which has about $3.7 trillion in assets, and TD Ameritrade did not respond to requests for comment.

Since the pricing pressures started in early October, TD Ameritrade's stock price had weakened by about 11%; today, it rose 24% to about $41.40 in pre-market trading.

Schwab and TD Ameritrade have said free trades are expected to reduce revenues, 3%-4% of net annual revenues for Schwab, 15%-16% of net revenues for TD Ameritrade.

But the move to zero commissions represents "huge savings" for advisors' clients, making it a "huge deal," according to industry recruiter and watcher Jon Henschen. "More clients will ask, 'Why are we paying these ticket charges? Why not zero?'"

The larger question mark, Henschen says, concerns the response of the large clearing firms: "It will be interesting to see how clearing firms react to this news, and if we see downward pressure on Pershing and [Fidelity's National Financial Services], etc., to lower their ticket charges to broker-dealers."

Effects of pricing pressures

Soon after E-Trade announced its embrace of zero commissions, Fitch Ratings said no-commission trades "will pressure industry revenues, further emphasizing the importance of net interest income from accompanying bank sweeps, wealth management and investment management revenues, and will likely drive further industry consolidation." 

Of the three brokerages, Fitch Ratings, rates only Schwab, which analysts Michael Taiano and Dafina Dunmore believe is "better positioned to weather the decline in trading commissions than many of its competitors"  due to its "scale and breadth of offerings."

Still Schwab's revenues, already under pressure from declining commissions, low interest rates and falling fees for mutual funds and ETFs, will suffer, according to the analysts' report.

"It  will be increasingly important for Schwab to further improve cost efficiencies while also growing client assets and exploring additional sources of revenue from its sizable client base," the Fitch analysts said. 

(Bernice Napach contributed to this report.)

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