UPDATE: Oct. 1, 2020: The Federal Reserve approved Morgan Stanley's acquisition of E*Trade on Wednesday, allowing the deal to continue.

Dive Brief:

• Morgan Stanley is acquiring brokerage firm E*Trade in an all-stock transaction valued at around $13 billion, the two companies announced Thursday.

• The deal, expected to close in the fourth quarter of 2020, is the largest by a major Wall Street bank since the 2007-08 financial crisis. E*Trade has more than 5.2 million client accounts with over $360 billion of retail client assets, adding to Morgan Stanley’s existing 3 million client relationships and $2.7 trillion of client assets, the companies said in a release.

• "E*TRADE represents an extraordinary growth opportunity for our Wealth Management business and a leap forward in our Wealth Management strategy," James Gorman, Morgan Stanley's chairman and CEO, said in a statement. "The combination adds an iconic brand in the direct-to-consumer channel to our leading advisor-driven model, while also creating a premier Workplace Wealth provider for corporations and their employees."

Dive Insight:

Morgan Stanley’s plan to buy E*Trade represents a monumental shift for the investment bank, as it focuses on smaller customers and not just the high net worth client.

Greg McBride, chief financial analyst at Bankrate.com, told Banking Dive the move reflects a growing desire among Wall Street banks for "Main Street customers."

"Between zero trading commissions and competitive yielding savings accounts and cash management products, the competition for consumers’ cash and investments is as fierce as ever," McBride said. "And this reaches a broad spectrum of households, it isn’t just the ultra wealthy that are in demand."

In a statement, Gorman said the move furthers the investment bank’s decade-long transition to "a more balance sheet light business mix, emphasizing more durable sources of revenue."

McBride said the acquisition of E*Trade gives Morgan Stanley access to brokerage customers, employees with company stock and low cost retail bank deposits, "the lifeblood of financial services."

The deal follows Charles Schwab’s $26 billion all-stock purchase of TD Ameritrade in November, a merger that caused E*Trade’s shares to tumble as well as call in to question the brokerage firm’s future in light of a merged competitor.

Morgan Stanley competitor Goldman Sachs has already made significant moves into the retail banking space, adding online consumer bank Marcus to its core business of trading in 2016.

The bank also launched a credit card in partnership with Apple, which Goldman Sachs CEO David Solomon touted as the most successful credit card launch ever.

E*Trade CEO Mike Pizzi will join Morgan Stanley where he will continue to run E*Trade within the investment bank’s franchise and lead the ongoing integration effort, Gorman said.

"We look forward to welcoming the infusion of management and technology talent that E*TRADE will bring to Morgan Stanley," Gorman said. 

Morgan Stanley said it expects cost savings of around $400 million from maximizing efficiencies of technology infrastructure, shared corporate services and combining the bank entities.

The bank said it also anticipates potential funding synergies of approximately $150 million from optimizing E*Trade’s $56 billion of deposits.