U.S. Investment Fund Transition To Schwab: What, When, Why?

In July 2019, USAA sold its investment businesses to Victory Capital and Schwab for $1.8 billion. The deal was approved by the boards of both companies and included a long-term referral agreement that made Schwab the exclusive wealth management and brokerage provider for USAA members. The sale was expected to close in 2020, subject to regulatory approvals. The transition of accounts to Schwab's systems was completed in May 2020.

USAA's reasons for selling its investment businesses

USAA's decision to sell its investment businesses to Victory Capital and Schwab in July 2019 was driven by a desire to focus on its core insurance and banking offerings. With over 13 million members, USAA recognised its relatively small size in the financial services industry and sought to ensure long-term sustainability.

USAA's investment managers were competing with companies that managed far more clients and significantly more money. As a result, USAA's fixed expenses were disproportionately high compared to larger corporations. This business model was unsustainable, and USAA would have had to invest significant capital to boost efficiency and attract more investors.

By selling its investment businesses, USAA could direct its attention and resources towards its core insurance and banking services, which have been its core offerings since its founding in 1922. This strategic shift allowed USAA to strengthen its position in these areas and better serve its members.

Additionally, the sale provided an opportunity for USAA members to benefit from the experience and size of Victory Capital and Schwab. These larger companies were expected to handle the investment funds more efficiently, potentially resulting in better financial deals for the account holders.

While the change may have impacted the original reasons USAA members chose to invest with the company, it demonstrated USAA's commitment to making decisions that benefit its members and ensure the long-term viability of its core businesses.

What Schwab's acquisition means for USAA members

In July 2019, USAA, a company serving over 13 million members of the US military and their families, sold its investment businesses to Victory Capital and Schwab. This was a significant transaction, as USAA serves 13 million members, employs nearly 34,000 people, and has a net worth of $30 billion.

USAA sold its investment management division, including brokerage and managed portfolio accounts, to Charles Schwab for $1.8 billion in cash. This means that Schwab will become the exclusive wealth management and brokerage provider for USAA members. This acquisition adds over 1 million new accounts and approximately $90 billion in client assets to Schwab's existing $3.7 trillion in client assets.

For USAA members who have investments with the company, these investments will now be serviced by Schwab. While members are still the owners of their accounts, they will now need to establish a login at Schwab's website to access and manage their investments.

The sale of USAA's investment businesses is expected to benefit members by allowing USAA to focus on its core insurance and banking businesses. According to USAA CEO Stuart Parker, "this agreement with Schwab can help enhance our members' financial futures with a client-first approach that offers access to more choices in investment products."

Additionally, Schwab's larger scale compared to USAA means that they can offer more services at a lower cost. However, it's important to note that Schwab will earn more money from this acquisition by paying USAA investors less on their cash holdings. Specifically, Schwab expects to generate approximately $130 million in additional revenue by moving USAA brokerage accounts sitting in high-yielding money market funds to its bank, which pays a significantly lower rate.

The transition of accounts from USAA to Schwab is expected to be seamless for members, with nearly 400 former USAA employees joining Schwab to support the transition and provide continued high-caliber service. A dedicated hub on the Schwab website guides members through the features and services available with their new Schwab accounts.

In summary, Schwab's acquisition of USAA's investment businesses means that USAA members will now have access to a wider range of investment products and services at potentially lower costs. However, it also means that they may earn less on their cash holdings. The transition to Schwab is expected to be smooth, with support from former USAA employees who have joined Schwab.

The impact on USAA employees

The USAA investment management division sale to Charles Schwab and Victory Capital impacted USAA employees in several ways. Firstly, the sale resulted in job losses for some USAA employees, with around 350 employees expected to "leave USAA" according to a USAA spokesperson. However, Schwab planned to offer jobs to at least 400 affected employees, and over 400 others would be considered for roles in the USAA Life Insurance Co. Additionally, Victory Capital hired around 50 USAA member service representatives as part of the transition.

The sale also meant a change in focus for USAA employees, as the company shifted its attention to insurance and banking services. This new focus aimed to enhance the financial security of military servicemen, women, and their families, who are USAA's niche market.

USAA employees also had to adapt to working with new strategic partners, Charles Schwab Corporation and Victory Capital, for investment services such as brokerage, trading, mutual funds, and ETFs. This involved coordinating with the new partners to ensure a seamless transition for members, as well as providing opportunities for cross-selling products to members without investments.

Furthermore, the sale impacted USAA employees' access to certain benefits. USAA employees were previously able to access USAA products and services as a benefit of working for the company. However, with the sale of the investment management division, employees may have had to adapt to using different investment services or transition their investments to Schwab or Victory Capital.

Overall, the sale of the investment management division to Charles Schwab and Victory Capital had both positive and negative impacts on USAA employees. While some employees benefited from new job opportunities, others faced job losses. The shift in focus to insurance and banking services and the introduction of new strategic partners also brought about changes in day-to-day work for USAA employees.

The value of military clients

USAA's members are also valuable to companies like Victory Capital and Schwab. These firms want to attract more military clients. America's military population is over 60 million service members, veterans, families, and immediate relatives. Out of those 60 million people, 13 million are USAA members, but only 2.5 million of them own investment accounts through USAA. That means nearly 11 million more USAA members could shop at Victory Capital and Schwab, and then those companies could sell to millions more. Victory will market USAA's fund brand to another 58 million people with military affiliations. If they attract just 2-3 million new shareholders, they'll spread their fixed expenses among twice as many people.

USAA has over 13 million members, and 1.5 million of them had invested billions of dollars in their fund shares. That small minority of members bought funds through USAA's investment services. An even tinier fraction paid USAA's wealth managers to handle their investments. Meanwhile, USAA was competing with companies that manage trillions of dollars for tens of millions of account owners. USAA was simply too small to compete.

Schwab will also gain a referral source through this acquisition. About 12 million USAA members don't have investments with USAA. Schwab will gain access to this client list and will be able to utilise it to realise synergies in the deal.

The future of USAA's core businesses

USAA's sale of its investment businesses to Victory Capital and Schwab in July 2019 marked a turning point for the company, allowing it to refocus its efforts on its core insurance and banking offerings. This move was driven by the realisation that USAA was too small to effectively compete in the investment business world.

By selling to Victory Capital and Schwab, USAA can take advantage of the larger companies' experience and size to better handle the funds and provide improved services to its members. This strategic decision positions USAA to enhance its insurance and banking services, ensuring they remain competitive and meet the needs of its members.

USAA's core insurance business has a strong foundation, having been established a century ago to provide insurance services to military members. Over the years, they have expanded their offerings to include banking, investments, and retirement products, catering to the specific needs of this unique customer base.

Looking ahead, USAA's insurance business is expected to benefit from the proceeds of the investment business sale, allowing them to improve competitiveness and distribute profits to members. This windfall provides USAA with the financial flexibility to invest in innovation, enhance their technology, and adapt to the changing needs of their members.

Additionally, by narrowing their focus to insurance and banking, USAA can streamline their operations and become more efficient. They can concentrate their resources on developing tailored products, services, and benefits that directly cater to the military community and their families.

In conclusion, the future of USAA's core businesses looks promising. By divesting its investment arm, USAA has set itself on a path of specialisation, allowing it to strengthen its insurance and banking offerings. With a long history of serving the military community, USAA is well-positioned to understand and meet the unique needs of this customer base, solidifying its position as a trusted financial partner for military families.

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