AAII Survey: Investors’ Thoughts on the Biggest Bank Merger Since the Financial Crisis

Morgan Stanley recently announced that it is acquiring discount brokerage E-Trade Financial Corp. in an all-stock deal valued at $13 billion, marking the biggest acquisition for a major U.S. bank since the 2008 financial crisis. The news prompted talk of Morgan Stanley’s status as a systemically important financial institution that is subject to Financial Stability Oversight Council rules, an entity established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. That legislation was put in place to prevent another crisis that would threaten the health of the U.S. financial system and sought to stop banks from growing “too big to fail.” Last year, Congress rolled back some of the Dodd-Frank regulations, raising concerns that banks would re-engage in the kind of risky behavior that required major government bailouts in 2008 and 2009. Those in favor of the recent law changes argue that previous regulations stifled economic growth, especially for smaller banks. Conversely, those opposed to the changes believe that big banks will take advantage of the new legislation and make riskier investments. We aimed to see what our members think about the E-Trade acquisition.

We asked our members about their concerns with the following question:

Do you have any concerns about Morgan Stanley acquiring E-Trade?

Here are the results:

Nearly 1,877 members participated in this survey.

E-Trade will give Morgan Stanley a huge number of new retail customers, but most important, E-Trade will also give Morgan Stanley a new pool of cheap cash deposits on which it doesn’t have to pay much interest. Whether or not such acquisitions are a good trend in the brokerage industry is yet to be determined. Of the 1,877 responses we received, 54% stated that they had no concerns regarding the Morgan Stanley E-Trade acquisition. This compares to the 27% of respondents who stated that they were concerned and 19% who stated that they are unsure at this time.

Follow-Up Special Question

This acquisition is in line with a larger trend across the wealth management industry where the largest banks in the financial services space are increasingly entering the retail and brokerage space. The Morgan Stanley and E-Trade merger marks the second of its kind in the past six months. We aimed to see what specific concerns AAII members had regarding this acquisition.

We followed up our poll with:

If yes, what specific concerns do you have?

Nearly all of the 200 responses we received named antitrust concerns in some way. Specifically, 45% of members named decreasing competition as their top concern. Many within this group believe that investors will be negatively impacted in the long term if such acquisitions continue. This compares to 38% of respondents who mentioned the “too big to fail” theory, which asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system. Finally, 18% of respondents stated that they are particularly concerned with higher fees as a fewer number of players remain in the broker industry. Notably, many within this group stated that they were current E-Trade customers and are also worried about the integration process with Morgan Stanley.

Here is a sampling of the responses we received to the follow-up special question:

• “Morgan Stanley charges fees for everything. They are not a fiduciary, so they tend to sell products with fees. I think E-Trade will be changed to an online service with hidden fees, messy account setups and confusing closing processes.”
  
  
• “Big banks are a threat to our economy. The more they get involved in the investment community, the more they represent a danger. Investment firms have a poor record in their negative impact on the economy.”
  
  
• “I think the focus will change from aiding me as a small investor to constant upsells, advice or services I don’t want or need.”
  
  
• “Will E-Trade’s culture get contaminated/replaced by that of Morgan Stanley where investors are viewed as lambs to be consumed?”
  
  
• “I fear the ‘too big to fail’ scenario is reemerging. Too much ‘wealth’ is being managed by too few firms. First TD Ameritrade to Charles Schwab, now E-Trade to Morgan Stanley. I have a small account with E-Trade and I worry about fees being imposed. I’m seriously thinking of transferring my account.”